At least the traders in the futures market “know” what the Fed will do next. They’re betting on a rate hike – you can tell because the futures markets are starting to discount an interest rate hike by the Federal Reserve in October.

Bond yields have risen sharply off their four-year lows in mid-March. Core inflation is strengthening. Also, the broadest gauge of money supply, the expansion of credit, is running at a dizzy 16% annualized rate. This data suggests the Fed is way behind the inflation curve and will start raising lending rates this fall.

But could the market be wrong?

I believe this rate hike prediction is WAY too premature. In fact, I’d say the Fed’s not even done easing credit conditions at this point. I’m still forecasting the Fed will hack the Fed Funds rate by at least another 1% before this easing cycle is over. The Fed Funds rate now sits at 2%.

To heal the banking system, the Fed must remain accommodative. Meanwhile, housing is still in a complete freefall and it’s showing no signs of bottoming. That’s yet another industry that can’t afford higher rates. Plus, with the unemployment rate gradually rising since last winter, the Fed will unlikely start cutting off precious liquidity when consumers and companies need cash flow.

Banks are still bleeding losses. It’s becoming increasingly clear that the credit crunch is far from over. Wachovia and Washington Mutual won this week’s booby prize for dropping another bomb on the financial services sector.

Mark my words: the Federal Reserve will sacrifice the dollar in its desperate attempt to revive growth and bank lending. Provided the bond market doesn’t fall apart along with stocks, this strategy should continue for the remainder of 2008.

I don’t expect the dollar to post big losses from these levels, but it won’t post a major bear market rally under these circumstances, either. Eventually, and assuming oil prices come down, the euro will start to deflate along with other European currencies, which I view extremely overvalued against the dollar.

The way to play this sluggish economy is to remain invested in select commodities, including gold, high grade corporate bonds, blue-chip global multinationals (excluding most banks) and Asian currencies, including the yen.

ERIC ROSEMAN, Investment Director

EDITOR’S NOTE: Click here to get an insider’s look at Eric’s commodity portfolio – and find out how to make 600 to 900% off his favorite brand of commodities for 2008.

Source: The Fed’s Not in a Rush to Raise Rates