The FOMC wraps up their two day meeting today and will announce the latest Fed funds target later this afternoon. It is widely anticipated that the Fed will cut rates by 25bp, lowering the target to 2.0%.

If there is indeed a cut today, it will be the seventh cut since the Fed began its easing cycle last September at the onset of the subprime crisis. Fed funds had previously been holding steady at 5.25% since 29-Jun-06. A cumulative 3% in easing. During that same period, the discount rate has been lowered by 375bp to 2.5%.

As monetary policy has a lagged effect, the Fed is likely to signal a pause, allowing them to assess the impact of the last several months of rate cuts and liquidity injections. The policy statement may show diminishing concern about the overall health of the economy and rising worries about inflation.

I think the one wildcard for the policy statement is how emphatic they are about their willingness to act should the economy continue to deteriorate. My sense is that they will give a pretty strong indication that they stand ready to cut rates further at the first sign of additional stresses. With this type of reassurance the DJIA is likely to move back above 13,000.

However, the Fed must be aware that they're running out of bullets. Once Fed funds are at 2.0%, four more 25bp shots would take us to the historic 1.0% low from 2003. We'll be just a mere 200bp from 0%, at which point quantitative easing would be the Fed's only option for stimulation. With that would come further debasement of the dollar.

The Fed certainly doesn't seem to have any aversion to pumping massive amounts of liquidity into the markets, as evidenced by the ongoing liquidity operations. These facilities will continue to operate during any pause in interest rate cuts.

Despite all that the Fed has done over the past eight months, the impact on markets has been negligible. Interbank lending rates remain stubbornly high and in fact have risen about 33bp since the Fed last cut rates in March by three quarters of a percent.

There is a prevailing environment of mistrust and suspicion among the banks. Recent quarterly earnings reports and further writedowns suggest that mistrust is not necessarily unfounded. The banks are apparently using all that new liquidity floating around to shore up their own balance sheets. I'm pretty sure that's not exactly what the Fed had in mind.

The banks remain unwilling to lend amongst themselves, so that liquidity certainly isn't making its way into the hands of mortgage borrowers and consumers. Mortgage rates have actually been trending higher nationally since 30 yr fixed rates bottomed near 5.5% in January.

While home equity loan and HELOC rates have come down, I think that's more a result of a dearth of demand than anything.

It all comes back to the deflating housing bubble, which initially spawned the subprime crisis, which begat the credit/liquidity crisis and the credit insurance crisis. If all the Fed's measures don't ultimately stabilize housing prices, the economy is going to continue its slide into recession.

The outlook for housing remains rather dismal based on recent home price data, foreclosure rates and mortgage application rates. There is nothing at this point to indicate that optimism is warranted. If the housing market continues to contract, so shall the broader economy.

That could put the Fed in a difficult position down the road, particularly if price pressures continue to accelerate as well.

Gold continues to suffer from GLD redemptions. Another 350koz came out of the market yesterday, dropping the total ounces in trust to 18.7Moz. Month-end liquidity needs may be driving the most recent round of redemptions, but it has been suggested that reallocations into equity may be a developing bias.

Risk appetite is indeed near a 7-month high, which has been modestly positive for stocks and the dollar. These gains have come primarily at the expense of commodities. The fact that oil has moved about $5 off its recent record high has weighed on gold as well.

Despite dollar and stock market upticks, I would suggest that both of these markets remain vulnerable. It is certainly premature to suggest that the dollar has reversed its trend. Similarly, I don't think anyone is calling that the high for oil is in place.

Good jewelry demand has been seen on this dip in gold, which has helped to contain the downside to some degree. However, we need to see the dominant downtrend in the dollar, and the uptrend in oil, start to re-exert themselves. Once we see that happening, we would look for the yellow metal to climb back above $900, which would ease short term pressure on the downside.

Gold Market Movers:

EIA crude oil stocks for the week ended 24-Apr +3.8M. Build in distillates as well. Gasoline stocks fall 1.5M.

US Q1 GDP (advance) up 0.6%, above market expectations, versus 0.6% in Q4.

US Q1 ECI up 0.7%, versus 0.8% in Q4-07.

Canadian GDP fell 0.2% in Feb, well below market expectations, versus +0.6 in Jan.

US ADP employment report for Apr up 10k, well above market expectations, versus 3k in Mar.

US MBA mortgage index for week ended 25-Apr -11.1%, purchases -4.8% refis -16.7.

UK Nationwide housing prices for Apr -1.0% y/y.

Is the worst over? Don't bank on it

Eurozone economic confidence slips rapidly