The FOMC voted to leave rates unchanged at its Aug. 13 meeting but is prepared to reduce rates should the need arise. Economic indicators were widely mixed this week with relatively good news on retail sales, housing starts and consumer prices. A more neutral view stems from an early reading of the consumer sentiment index. Production news looks miserable -- not so much from industrial production for July but the prospect of worse news indicated by the Philadelphia Fed's business outlook survey for August.

Equity investors were somewhat disappointed by the lack of a Fed rate cut, but who's to say that they wouldn't have been even more concerned if it actually happened? Bond investors weren't really expecting a cut this month but are fully prepared for a rate reduction at the September meeting. If economic conditions were to deteriorate significantly, it would be in the Fed's best interest to reduce the funds rate further. In the meantime, we wait and see.