• Lowe's Companies (NYSE: LOW) to report Q1 earnings; conference call scheduled for 9:00am.
• Campbell Soup Company (NYSE: CPB) to report Q3 earnings; Conference call scheduled for 10:00am.

• Senate Judiciary Committee Hearing on Global Internet Freedom & Corporate Responsibilty at 10:00am. Appearing: Google, Inc. (NASDAQ: GOOG), Cisco Systems, Inc. (NASDAQ: CSCO) and Yahoo! Inc. (NASDAQ: YHOO).
• Medtronic, Inc. (NYSE: MDT) to report Q4 earnings; conference call scheduled for 8:00am.
• Hewlett-Packard Company (NYSE: HPQ) to report Q2 earnings; conference call scheduled for 5:00pm.

Former Fed Chairman Paul Volcker gave testimony today before a Joint Economic Committee of Congress. He addressed the current financial and economic environment and the role of the Federal Reserve.

He discussed how the financial market environment has changed considerably since his tenure as Fed Chairman in the early and mid 1980's. He pointed out that financial institutions like investment banks and hedge funds, whose failure can have tremendous effects on the financial system, are lightly regulated. "Systemically important investment-banking institutions should be regulated and supervised" in a similar manner to commercial banks.

Chairman Volcker stressed the need to update the entire regulatory framework, saying "It's not simply a matter of inexperience or technical failures." He also discussed the need to update regulations on a global basis because of the increasing coordination between world central banks.

Federal Reserve Chairman Ben Bernanke addressed the Federal Reserve Bank of Atlanta Financial Markets Conference in Sea Island, Georgia this morning via satellite. He discussed in detail the recent provision of liquidity by the Fed.

He discussed the shift in Fed monetary policy from its primary reliance on open market operations to lending tools used to address the credit crisis more directly. He mentioned the increased use of the Term Auction Facility (TAF) by commercial banks" from $20 billion at the inception of the program to $75 billion in auctions this month" and indicated that the Fed is willing to increase the use of these auctions as necessary.

He also discussed the extension of Fed credit to primary dealers through the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF). He mentioned that extending credit to primary dealers was an extraordinary move driven by the potential for a scenario "in which a cascade of failures and liquidations sharply depresses asset prices, with adverse financial and economic implications." He indicated that although improvements in the credit markets have occurred, there are still substantial problems that remain.

Many people are saying that the rise in oil prices is the result of loose monetary policy. They say that there is an easy solution to the problem. Raise interest rates substantially, and the problem will be solved. Since the rise in oil is also the primary cause of rising inflation, the inflation problem will be resolved as well.

There are several problems with this line of reasoning. Oil continued to rise as the Fed began to increase interest rates in 2004. Prices doubled as the Fed substantially tightened monetary policy. Europe also has the some of the same inflation issues that we face despite the refusal of the European Central Bank (ECB) to lower rates.

Then, there are the big questions. Why are oil prices rising? What is the short-term solution?

I believe that the main reason for the rise in oil prices is the rise of the developing world. The two nine hundred pound gorillas in this equation are India and China. Automobile demand is increasing in these countries and is likely to continue in the near future.

This is similar to the rise in oil prices in the late 1960's and early 1970's. After World War II, the United States was the primary industrial power. As the world industrialized, demand for oil increased. The United States was not the only nation driving cars extensively. Supply constraints were also introduced in the mid to late 1970's with the Arab oil embargo and the Iranian revolution.

Bloomberg News reports that someone at the Fed has finally developed a bit of common sense --that is if you believe that the Fed's job is to fight inflationary expectations. Amazingly enough, the president of one of the Fed banks failed to repeat the standard mantra that "core inflation" is under control.

Instead, according to Bloomberg, Federal Reserve Bank of Kansas City President Thomas Hoenig said "serious" inflation pressures may compel the Fed to raise interest rates. He said that the current account deficit is a problem thanks to the weak dollar. And he argued that the combination of slowing growth and inflation is "troublesome." He observed that rising global commodity prices and higher prices of imported goods from China and other markets are pushing up prices.

And here's the kicker. Hoenig said, "Some would dismiss these rising inflationary pressures as temporary. I believe they are more serious." Hoenig thinks that the economic slowdown will be short-lived and that the Fed will need to raise rates quickly. He noted, "As the economy recovers and credit conditions improve, however, it will be necessary for the Federal Reserve to remove the policy accommodation in a timely manner."

Bloomberg News reports that the Fed is increasing its so-called Term Auction Facility (TAF) by 50% to $75 billion. The reason? The program, which makes emergency loans to banks saddled with asset-backed securities (ABS) such as collateralized debt obligations (CDOs), is busted. That's because the TAF is designed to lower borrowing costs but it has accomplished the opposite.

This comes in response to criticism from a Stanford University economist, John Taylor, who wrote in a study last month that there is "no empirical evidence" the TAF has reduced the premium that banks charge each other to lend cash for three months. In fact, last month's TAF auctions were 2.82% and 2.87% -- above the then-2.5% rate on direct loans through the Fed's discount window. This "seeming anomaly" of the higher rate may have resulted from banks' willingness to pay a premium to avoid the stigma of borrowing from the Fed's discount-window.

This means that despite all the happy talk on Wall Street, we are not out of the woods by any stretch of the imagination. As I pointed out here, investment banks and hedge funds borrow $32 for every dollar of capital. If they owned just those dodgy securities, a mere 6% drop in the $6.1 trillion market for CDOs would wipe out their $340 billion worth of capital.

The Federal Open Market Committee (FOMC) reduced interest rates by a quarter of a percentage point, taking the target Federal Funds Rate to 2% and the Discount Rate to 2.25%, as expected. However, the indication of at least a pause in interest rate cuts was not present. On the contrary, the Fed maintained its dire view of the economy mentioned in the March statement. The only positive indication that it gave was dropping the sentence "However, downside risks to growth remains." Two FOMC members voted against the rate cut as they did previously during the March meeting.

The stock market, which had been up by as much as 1% prior to the Fed announcement gave back all the gains and closed slightly down. Gold closed up slightly, and the dollar closed down.

What were the reasons that the Fed maintained this position and did not indicate a pause?

First, the Fed still believes that there is still substantial risk in the economy and further rate cuts could be necessary. There have been several positive economic and earnings reports lately and the stock market has drifted higher. If the Fed had signaled a pause, it may have been concerned that this could indicate an all-clear signal and ignite a rally. Negative news in the future and additional rate cuts might then be interpreted negatively. This could trigger a steeper falloff, increasing volatility. The Fed decided to take a cautious approach and manage investor expectations.

Fed rate cuts help people who hold adjustable rate mortgages (ARMs) but they're less valuable to people seeking new mortgages.

That's because ARM rates reset periodically -- e.g., every year -- based on an index plus a lender's margin -- the amount a lender adds to the index, usually two percentage points or four percentage points, to set the actual interest rate of the ARM. The most common index for ARM adjustments is the one-year U.S. Treasury bill.

Last Friday, the one year treasury rate was at 1.88% -- down 3.04 percentage points below the 4.92% rate it was at in April 2007. The Fed's rate cutting has lowered the rates at the reset periods for those who already have adjustable rate mortgages. So a person who paid 2% plus the 1-year t-bill rate in April 2007 would have paid 6.92% during the last year and enjoyed a reset to 3.88% as of last week.

The Fed's job is to control inflation. But is was established originally to keep financial panics from getting out of control. Since last August, it has reverted to its original role and failed miserably. Since it began cutting its Fed Funds rate 57% from 5.25% to 2.25% the price of a barrel of oil has risen 62% from $71 to $115. Simply put, the weaker the dollar, the higher the price of oil. Bloomberg News proves it -- noting that in the last year, there was a 0.96 correlation -- a correlation of 1.0 would be a completely safe bet -- between the Euro-dollar exchange rate and the price of oil.

If it bothers you to pay $3.66 for a gallon of gasoline you can thank the Fed along with cheerleader, Hank Paulson who brags that he's been talking about the U.S.'s strong dollar policy consistently. Of course saying and doing are two different things. Since January 2001, the dollar has lost 70% to the Euro. And since oil is traded in dollars, a drop in the dollar leads to a rise in price. And lower interest rates erode further the value of the dollar since it pays government bond holders a lower rate of return so they sell the U.S. currency and buy higher yielding ones.

But it's unfair to give the Fed all the blame. After all, we have been running the Federal budget at a deficit -- expected to hit $413 billion this year. Since the Fed has started cutting rates, other factors such as speculation by leveraged traders -- relying on the 0.96 correlation -- and political instability seem to have remained at the same level -- although the degree of speculation seems difficult to measure. And U.S. demand has declined due to the economic slowdown. So it looks like those dollar-weakening rate cuts are the one factor powerful enough to offset the demand slowdown to drive prices up.

With investors awaiting the Fed's interest rate decision, the focus of the decision will be felt in the currency markets. In an AP report: "The Federal Reserve is poised to deliver another interest rate cut to millions of people and businesses this week, although that could be the last break they get for a while."

This scenario may be just what the doctor ordered for the dollar. In anticipation of the announcement, the greenback has staged a minor technical rally, albeit on lackluster volume. If the currency market would get the news that future rate cuts are on hold, the dollar may very well start a recovery.

The reason for the recovery is twofold: Firstly, there is interest rate differential. This has been the major driver in the currency market over the last few years. If the Fed would signal an end to rate cuts, by definition this would mean that the differential would no longer widen. The second reason is economic growth. The US was the first major country in the world to enter this period of lackluster growth and with the steps taken( fiscal stimulus and rate cuts), the right measures were implemented to make sure that the US is the first country to get out of the mess. My hunch is that we will see currency markets move away from the 'interest rate differential trade' to that of one focused more on growth.

As I have mentioned many times, the situation in the Euro-zone is nothing to write home about. Surging inflation, slow growth, the banking sector in turmoil. Sounds familiar. The only difference is that the ECB has done nothing to try and right the ship, while the Fed has. Ultimately, when the US gets back to above-average growth late this year or early '09, the aggressive stance the Fed took will be viewed as the reason for the recovery.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 4/29/08

Hyperbole? Maybe.

The former head of monetary policy at the Fed called the agency's action on Bear Stearns (NYSE: BSC) the "worst policy mistake in a generation." To some extent, the comments by Vincent Reinhart reflect his opinion that the Fed did not look at a number of other alternatives for saving the investment bank. According to The Wall Street Journal, "seeking other suitors, removing certain assets from Bear's portfolio or quickly implementing its previously announced offer to temporarily swap Treasury securities for dealers' less liquid assets" were all options.

The comments beg the question of what would have happened to the financial markers if Bear Stearns failed. The answer the Fed gives is that assets of other firms could have been destroyed or at least might have lost some of their value.

Rienhart may have a point. The Fed has made funds available to banks in exchange for paper, some of it with little value, which is, in many cases backed by mortgage-related securities. More recently it has let primary brokers have access to money on a similar basis. That mechanism was not in place when Bear Stearns was sold to JP Morgan (NYSE: JPM) with Fed backing. Reinhart's real question is whether it was necessary to wipe our the investment bank's shareholders in exchange for saving its customers.

The Fed probably did act too fast. How many days would it have taken to ask for other bids for the investment house? Could the Fed have kept Bear afloat during that period? The answer is almost certainly "yes".

Douglas A. McIntyre is an editor at 247wallst.com and writes the Ten Stocks Under $10 Letter.

Most observers believe the Fed will cut rates a quarter of a point this week and then take a "wait and see" position on the economy.

There is a very good chance that events over the last week will cause the Fed to keep interest rates just as they are.

Interruptions in oil supply have pushed the price of crude for June delivery to almost $120 a barrel. This not only means that gas prices in the US could go above $4 but the costs of petrochemicals and heating oil should continue to move up sharply.

Food prices in the first quarter went up as fast as they have at any time in the last 17 years.

The other reason that the Fed may stop cutting rates entirely is that banks are taking the savings from lower rates to build their balance sheets but are not passing those lower rates on to consumers and businesses. Much of the value of being able to borrow money for less is not being seen in the economy at all. For example, the rates for mortgages are not going down.

With inflation running at an especially high level and credit rates unlikely to get better, the reasons for the Fed cutting rates further are harder and harder to identify

Douglas A. McIntyre is an editor at 247wallst.com and writes the Ten Stocks Under $10 newsletter.