The Fed’s kickoff of the 2005 Season will occur on February 2. Fans are already talking about their predictions. But the Fed says its game is all about predictability, which means equal steps of 25 basis points. However, the rest of the year will be a game of musical shares, or the toss of the proverbial coin – they don’t toss coins only in the currency markets. There are eight FOMC meetings scheduled for the year, and possibly five 25-point moves. We think the long hot summer is a good time for a break in the Fed Funds escalator, that is how we would toss the coin, and then the Fed could resume the rate increases in the Fall.

On the subject of the FOMC, we wonder who writes the public statements they feed the media at the end of each meeting, since the reference in the December minutes to concerns about cost factors being "embedded in higher inflation" was out of synch with the PR statement referring to equal risks of higher or lower inflation. It appears that two-armed economists have infiltrated the Committee, they should be placed on the Homeland Security Agency’s watch-list.

Consumers were good during the Holidays, in fact Santa brought them plenty of presents, and retailers had a big smile on their face, and it wasn’t just the Egg Nog. Retail sales were up 1.2 percent in December, or 8.7 percent with respect to December 2003. The University of Michigan consumer sentiment index also moved up in December.

The mainstream forecasters – based on the WSJ survey, are calling for a relatively good 2005: higher than normal GDP growth of 3.5 percent accompanied by lower inflation. Higher commodity prices, the surge in oil prices, and lower growth of productivity appear to have been just a bad dream, and now we are back to Alice in Economic Wonderland. The upbeat forecast is based on the assumption of lower oil prices, Fed restraint in raising the Funds rate, and a tepid dip in the price of the long bond.

Based on our contrarian viewpoint, we expect the pendulum to swing in the other direction, with growth slowing to about 3.25 percent and inflation moving up from 2.7 percent in 2004 to about 3.3 percent this year. We think producers will be more prone to pass along on some the increase in energy and other commodity prices they experienced last year to the prices they charge for other items in the consumer basket, but not to worry, since you will be told that anyone with common sense would realize that those items with higher prices will now need to be excluded from the price index. Despite the fixing of the price index, the 20 year bond is likely to end the year at 6.25 percent.

The once almighty dollar is now the subject of derision, the Fed says its value depends on nothing more than the toss of a coin, and the Treasury just keeps spending it and offering more of them at basement prices. US consumers don’t seem to want to hold them, but rather spend them on more imports. After all this abuse, more dollars will have to beg for one Euro, as many as $1.5 per Euro, and only then will our hemorrhaging trade deficit start to dwindle, but the damage will already have been done and inflation will regain its nimble pace.