The fed policymakers are confused about the effects Fed rate rises are having on the economy. Instead of reining in economic growth, rate increases seem to stimulate growth, in violation of all economic laws. Fed boss Alan Greenspan has already labelled the situation a “conundrum”.

Here are the numbers: commercial and industrial loans posted a 6.6% rise since May 5, a month before the Fed raised rates for the first time in June 2004. M&A activity has risen to its peak since 2000 in the first six weeks of 2005. Housing starts showed a 4.7% rise in January hitting a 21-year high.

Most surprisingly, the increases in fed rates did not trickle into long-term rates. 30-year fixed-rate mortgage rate was down to 5.48%, a 10-year low. Bond markets have beaten records as rates continue on Treasurys to fall.

``This is a unique experience,’’ Meyer, a Fed governor until 2002, said in an interview. ``From the very moment the Fed began to tighten, long rates are falling.”

The bond market has been especially enigmatic. Various reasons have been cited as explanations on why the rates continue to fall despite Fed’s tightening. Some say that economists continue to be worried about economic growth, while others point to a possible lack of supply of long-term securities as investors have seen a shortening of bond durations.

Now the big question is: is the recovery going to shove inflation numbers up if Fed’s attempts to rein in the economy seem to have so little effect? The surging oil prices remain a threat. So far consumer prices did not post significant increases as consumers supposedly reduced their spending on other items as they are forced to pay for gas. As a result, the manufacturers have not yet been able to pass on an increase in prices to their customers. In some cases, stiff competition forces the companies to bear the burden of higher costs on their own. Will this curb the economic turnaround? So far the story has been different. Economists are saying “no” as they up their projections of economic growth to 3.7% in 2005.