The event is creating quite a stir but I am a little confused if people think that Fed Chief Ben Bernanke could be less opaque live than in a canned statement or in front of a Congressional hearing. Or more to the point, if what he says can tell us more about the direction of the economy than today’s S&P Case-Shiller Home Price Index, which showed prices in February for the 10-and 20-city composites are lower than a year ago and only slightly above their April 2009 bottom, or Thursday’s GDP report.

Case-Shiller’s 10- City Composite fell 2.6% and the 20-City Composite was down 3.3% from February 2010 levels.

David M. Blitzer, chairman of the index committee said, “There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing.”

The report goes on to note that, measured from their peaks in June/July 2006 through February 2011, the peak-to current decline for the 10-City Composite and 20-City Composite are -32.5% and -32.6%, respectively.

I guess that answers the question as to what part of the economy is declining to offset rising energy and food prices, which allows the Fed to claim inflation is not a problem. Unfortunately it doesn’t help homeowners that they are losing equity while shelling out more for everything they must purchase.

John Prestbo, editor and executive director of Dow Jones Indexes, talked about today’s market action in a statement while offering caution over tomorrow’s press conference. He wrote, “With today’s flurry of positive earnings reports, it’s no surprise that investors responded by pushing the Dow up to its highest levels in nearly three years. This wave of optimism could be challenged within the next 24 hours, however, as the market will undoubtedly be riveted to the Fed’s first-ever press conference tomorrow.”

The Wall Street Journal online offered a guide on keywords to listen to. Pardon me if I sound rude, but we are talking about parsing the words of a man who claimed their was little risk of a deepening credit crisis a few months before the worst economic crisis since the Great Depression and  someone who has refused to  acknowledge the inflation staring every consumer in the face. He also said there was little risk of moral hazard following the sweetheart deal the Fed put together for Bear Stearns and watched as Lehman Brothers wilted while expecting the same treatment.

In the past, bad economic news moved the markets in a positive direction because analysts assumed it would result in lower interest rates from the Fed, but with the zero interest rate policy now 28-months old and two rounds of quantitative easing nearly complete, would more easy monetary policy really be good news?

The press conference could give the media a chance to pin Bernanke down.  Ernie Patrikis, a regulatory partner with law firm White & Case who is also a former general counsel of the New York Fed and former alternate member of the FOMC, sees it as a good thing but wants more. “Why isn’t there a press conference after each meeting?” he asks. He goes on to say in a White & Case release, “There are complaints about the loose monetary policy under Chairman Greenspan. I do not recall Congressmen criticizing him for that then. Might the press do a better job?”

I guess we will find out tomorrow but if Bernanke says anything that causes the markets to move off its lofty (nearly-three-year) highs, will anyone be demanding a repeat performance?

In one of our online exclusives for the July issue, Steve Beckner notes that there’s no end in sight for the Fed’s current monetary policy, due in part to major risk aversion from Europe.  He says most of the Fed’s tough policy decisions will come next year. The experts we spoke with for our interest rate outlook were of the same opinion, saying that rates will not rise until 2011 or even 2012, with Europe and plodding economic recovery in the U.S. as key factors.

We noted here yesterday how we were a little confused with the positive response to the poor Gross Domestic Product report showing back to back quarterly GDP declines of greater than 6% for the first time in more than 50 years.

Then yesterday afternoon the Fed released its statement. The Fed kept the target Fed Funds rate between zero and 0.25% and noted they would continue buying debt at the levels set at its previous meeting (some had expected/hoped they would increase purchases of Treasuries).

On the economy it stated in its opening sentence, “Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower.”

In other words, things are getting worse but at a slower pace. Somehow this was translated in nearly every wire story and analysis I read as the economy is getting better. How? Contraction is contraction. It is a bad thing. As noted yesterday some of us have gotten it into our heads that this is all in our heads. If we only kept a positive outlook, things would look positive.

Yes they put the obligatory positive spin in it, “Although the economic outlook has improved modestly since the March meeting,” it was clear that they didn’t attempt to signal ant type of recovery, “economic activity is likely to remain weak for a time.”

No one likes listening to a pessimist. It is depressing. But apparently too many of the so called experts are so divorced from reality that they think perception is reality. That has become a popular thing to say but reality is reality.

I am all for keeping a positive outlook but that is not the same things as deluding ourselves. Arguably one of the biggest contributors to our current economic crisis is our inability to accept hard truths. We went from one bubble to another to avoid taking a loss.

A newswire story citing a minor shift towards concern over slow economic growth from inflation caused me to look at the release closely.

I guess it was there somewhere but darned if I could find it. It is odd that they would abandon their shift from inflation after only just discovering it despite it being apparent for quite some time. But as Economist John Williams noted in the July issue of Futures, “The Fed is not concerned with inflation. It is not concerned about the economy…its primary function is keeping the banking system solvent.”

And raising the Fed Funds rate will not help on that score. So while its new found hawkishness earlier in the summer pushed expectations for a round of tightening by yearend, that expectation has drifted away and now rates are expected to remain at 2% through yearend. And as several analysts have predicted the next move may be another easing. After all, if they can ease with 4.9% GDP and elevated inflation as they did last year, they can ease whenever.

While the Fed talks of inflation, Williams points out that the cost of the Fed providing liquidity to troubled banks is ultimately more inflation. But they will worry about that once the solvency crisis is over and we still do not know when that will happen.

Tuesday we where hit with record poor housing numbers and a continued decline in consumer confidence. The S&P Case-Shiller Home Price Index for March showed “continued broad based declines in the prices of existing single family homes across the United States.”

Their National Home Price Index recorded a 14.1% year over year decline for the first quarter of 2008, the largest decline in the 20-year history of the index. The 10-City composite dropped 15.3% year over year and the 20-City composite dropped 14.4%.

“The steep downturn in residential real estate continues,” said index committee Chairman David M. Blitzer in a release. “There are very few silver linings that one can see in the data. Most of the nation appears to remain on a downward path, with 19 of the 20 metro areas reporting annual declines, and six of those now at negative rates exceeding 20%.”

Adding to the bad news was another multi-year record low in the Conference Board’s Consumer Confidence Index. The index dropped to 57.2 for May, down from 62.8 in April, a 16-year low. Director of The Conference Board Consumer Research Center Lynn Franco said in a release, “Weakening business and job conditions coupled with growing pessimism about the short-term future have further depleted consumers’ confidence in the overall state of the economy. Consumers’ inflation expectations, fueled by increasing prices at the pump, are now at an all-time high and are likely to rise further in the months ahead. As for the short-term outlook, the Expectations Index suggests little likelihood of a turnaround in the immediate months ahead.”

Despite the bad news equity markets rallied Tuesday thanks to a drop in crude oil back below the $130 level. The near 70-point rally in the Dow Jones Industrial Average was most likely a reaction to crude and profit taking from last week’s huge decline. In the past, equities rallied on bad news because the market saw it as a sign the Fed would cut rates but the minutes from the April Federal Open Markets Committee (FOMC) meeting indicated a new found concern for inflation.

All of the Fed’s weaker economic projections stopped just short of declaring that we are in or are headed into a recession. But the dubious use of core Consumer Price Index (CPI) inflation measures that exclude food and energy as opposed to the broader measure as the deflator in Gross Domestic Product (GDP) calculations is the difference between whether we are technically in a recession or not. So I guess those of us who do not eat or use energy are not in recession, the rest of us are.

The report stated, “The projections suggest that FOMC participants expected economic growth to be much weaker in 2008 than last year, owing primarily to a continued contraction of housing activity, a reduction in the availability of household and business credit, and rising energy prices. The unemployment rate was expected to increase significantly.”

That is clear enough and the Fed probably should have stopped there. The projections are a compilation of predictions from Federal Reserve Governors and Reserve Bank Presidents. The report included the following pearls: “Most participants viewed the risks to their GDP projections as weighted to the downside and the associated risks to their projections of the unemployment rate as tilted to the upside.”

I am not sure what that means but I bet they could have said it more clearly if they really tried.

And: “Regarding risks to the inflation outlook, participants pointed to the possibility that economic slack could put either more or less downward pressure on costs and prices than anticipated.”

Well that is clear: inflation will either be higher or lower than the outlook. Way to step out.

More and more, the numbers reported by the government are being questioned. The recent April CPI report stated that energy costs dropped for the month once seasonal adjustments were made. A hard pill for those of us paying $4 plus for a gallon of gas.

Based on the prices of distant Fed Funds contracts, this will be the last rate cut of the current easing cycle and the Fed will begin tightening rates beginning with a quarter percent increase back to 2.25% at the meeting ending on Oct. 29 or at the December meeting.

In mid-March Fed Funds futures prices indicated that the Fed would drop the Fed Funds rate to between 1.50% and 1.25% by the fourth quarter. It appears that the Fed is finally heading the inflationary warning signs, but why now?

Never has the Fed been more aggressive in its easing, particularly without acknowledgement that the economy is in a recession, then it has since the current cycle began in September. That the Fed would begin tightening when the economy is likely to be feeling the full affect of the current downturn and as our consumer driven economy is entering the holiday spending season, seems odd. But as we noted here before, the Fed is close to running out of bullets and the real inflationary pressure the economy is facing can no longer be ignored.

But I think it is fair to ask, why wasn’t the Fed concerned about the real inflation pressures that were obvious to many of us back in September when they launched this aggressive easing cycle?

While Fed Fund futures have been a accurate predictor, it would be good to remember that the best predictor of Fed activity over the last year has been the equity markets. When the Dow has dropped the Fed has come riding to the rescue. And if the economy officially falls into recession (which may already be the case) and equity markets retreat, there will be a great chorus of voices from Wall Street calling for additional easing. The current Fed has no experience thus far in disappointing those voices.

Perhaps the best gauge is the market and based on the April 2008 Federal Funds futures contract traded at the Chicago Board of Trade, the market is expecting a full point.

One trader on the floor expects equity index markets to react positively to even a 75 basis point cut but if the Fed comes in with anything lower, our trader says, “It will get ugly to the downside.”

With such aggressive market expectations continuously being met by Mr. Bernanke and the Fed, you have to wonder what will happen if the economy does not turn around quickly. A full point rate cut leaves the Fed with very little ammunition. All the experts we talk to expect further subprime fallout and say the we are still not close to seeing the complete magnitude of the current credit crisis.

At the current pace, the Fed will run out of bullets before we run out of stories of further write downs, declining housing markets and investment banks at risk.

“The ball started rolling with the recession-like rise in unemployment in December,” says Jim O’Sullivan, UBS chief U.S. economist, adding that last month’s decline in the CEO confidence index, combined with a slipping stock market and weak jobs report have tipped the balance. “It’s just the sense that businesses and consumers are getting more cautious. And the down turn in housing is starting to feed on itself,” he says, adding that he anticipates recovery in the second half of 2008.

O’Sullivan also notes that today is the first time since 9/11 that the Fed has done an inter-meeting rate adjustment. “Certainly the market has calmed down today. The market is only down a little over 1% [down] now, when we were looking at minus 5%,” this morning, he says. He also is expecting another rate 50 basis point cut at the Federal Open Market Committee meeting on Jan. 29.

“At this point, if we are moving into recession, it’s just limiting how bad it will be, rather than affecting whether we are going to have a recession. They are worried obviously and they are trying to get in front of this. There has been some criticism that they are moving too slowly, but I think they are showing some aggressiveness here.”

Since Bernanke’s testimony on Jan. 17, suddenly there is a consensus between the President and the Congress that we need a financial stimulus package. “The mood has changed dramatically in the last couple weeks,” he says. “In the end, it should at least limit the weakness,” he says, but whether it is enough to avert a recession remains to be seen.