Fed Announcement Should Show Little Change

The market is flattish in early trading, ahead of today's FOMC meeting. I do not expect there to be much change, if any, in the Fed's statement that will be released this afternoon. If there is any change, it is likely to just be additional color on the end of the MBS purchases scheduled for this month.

European bourses were higher after reports surfaced that officials have reached some agreements to provide financial aid to Greece, although no specific amounts were released.

Asian markets were mixed, with Japan edging lower and China bouncing +0.5%.

In economic news, import prices fell -0.3% in February, housing starts were weaker than expected (-5.9%) last month, but building permits fell less than expected (-1.6% vs. -3.4% consensus). Severe snowstorms in the Northeast may have skewed these figures, which are always lumpy to begin with.

The dollar is lower this morning, which is boosting commodity prices, as well as the energy and materials sector. Oil is higher to $80.80, while gold is also up near $1124.

The 10-year yield is lower at 3.67%; and the VIX is slightly lower to 17.90.

Among the sector ETFs, materials are strongest (+0.90%), while healthcare is weakest (+0.0%). Gold is up the most among the sub-sectors (+2.58%), while homebuilders are lagging (-0.06%).

Trading comment: The market remains a bit extended due to its streak of up days. I have raised some cash in our aggressive accounts to take advantage of any pullback. But I am not turning bearish. I expect any dip to be a pause that refreshes, and I think the recent breakout to new highs in the Nasdaq and small- and mid-cap indexes is an indicator that the markets can continue to climb in the intermediate-term.

On Tonight's Kudlow Report

This evening at 7pm ET:

DODD FINANCIAL REGULATION: WHAT WILL BE THE IMPACT ON BANKS, BANK LOANS, MARK TO MARKET?

NBC's Steve Handelsman reports from Washington.

- Ron Kruszewski, Stifel, Nicolaus Chairman & CEO
- Mark Calabria, Director of Financial Regulation Studies at the Cato Institute
- Frank Sorrentino, North Jersey Community Bank
- Thomas Harrison, Michigan Ladder Co. CEO

AIG BONUSES
- Richard Blumenthal, CT Attorney General

HEALTHCARE HOMESTRETCH SECTORS
-THE WINNERS & LOSERS

CNBC's Hampton Pearson reports from Washington.

CURRENCY PROTECTIONISM: SHOULD U.S. GET TOUGH WITH CHINA?

- David Goldman, Senior Editor First Things Magazine
- Peter Navarro, "The Coming China Wars" Author' Univ Of CA/Irvine Business Professor

FED MEETING PREVIEW
-WHY IS FED STILL AT A ZERO INTEREST RATE?
-HOW ARE THEY GOING TO TIGHTEN IF THEY'RE REGULATING?

- Bob McTeer, CNBC Contributor; Fmr. Dallas Federal Reserve Bank Pres. & CEO
- Jack Ablin, Harris Private Bank Executive VP & Chief Investment Officer

Please join us. The Kudlow Report. 7pm ET. CNBC.

Quote of the Day

Retired Tiger hedge fund manager Julian Robertson recently said this about Obama:

"Obama, from all I read, thinks that on every occasion that he is the smartest person in the room. And I think he often probably is, but you can't run the biggest business in the world having never run even a country store."

Monday Morning Musings

The market is trading lower this morning, after the S&P 500 Index ran into resistance at the 1150 area, which is the level of its previous highs back in January.

The Nasdaq is also lower, led down by Apple (AAPL), which looks to just be profit taking, and Google (GOOG), which is down by -3.3% after news came out that the search engine giant is no longer censoring its search results in China. This could cause them to get booted from the country. That would benefit Chinese-search company Baidu (BIDU), and that stock is spiking +7.0% on the news.

Amid sector ETFs, consumer staples (XLP) are leading (+0.42%) after Pepsi (PEP) said that it will boost its dividend by 7%. Energy stocks (XLE) are taking it on the chin so far (-1.80%).

Asian markets were mostly lower overnight, led by China (-1.2%) amid continued concerns that the country's central bank will further tighten monetary policy.

The dollar is higher today, which is pushing oil prices below $80, while gold is hanging in there near the $1105 level.

The 10-year yield is higher at 3.72%, and the VIX is spiking a little, up +5.8% to 18.60.

Trading comment: The market is up a lot over the last couple of weeks. In our aggressive accounts, we are raising a little cash to take advantage of a potential pullback. But in our balanced accounts we are pretty much just sitting tight with the cash we already have, and will look to add more to our favorite names on said pullback.

I haven't finished my latest sentiment roundup, but for the most part the sentiment indicators have started to move off of their previous bearish levels, but still have room to run before they start flashing warning signs of becoming overly bullish and complacent.

long AAPL, GOOG

Yellen Is Spellin' Future Inflation

The new Obama Fed is going to be very dovish when it comes to fighting future inflation and defending the value of the dollar.

The president has nominated Janet Yellen to be vice chair of the Federal Reserve. Ms. Yellen is a distinguished economist who unfortunately subscribes to the Phillips-curve model that trades off unemployment and inflation. In other words, rather than excess money creation as the cause of rising prices, she focuses on the unemployment rate, the volume of new jobs being created, and the growth of the overall economy. For Ms. Yellen, inflation is caused by too many people working and too much economic prosperity.

And since we have the opposite problem today -- high unemployment and too few people working -- she will be the last Fed governor to turn out the lights on the central bank’s zero interest rate.

There is no evidence in Ms. Yellen’s public opinions or speeches that she might use a market-price rule -- targeting commodities, gold, bond rates, or the dollar -- as a forward-looking inflation (or deflation) signal. So the absence of a commodity- or dollar-price rule will continue at the Fed. Ben Bernanke doesn’t use a market-price rule, and Obama’s additional Fed appointees -- whoever they are -- will undoubtedly come from the same Phillips-curve camp.

Supply-siders like myself who believe that only market prices can provide accurate signals of the supply and demand for money are going to be very disappointed. If the Fed supplies more cash than markets want, the inflation rate can go up whether unemployment is high or low. We learned this painfully in the 1970s, when high unemployment was accompanied by high inflation.

Even more troubling, fiscal policies coming out of Washington will reduce the investment demand for money. This is because tax rates on those individuals, families, and entrepreneurs who are most likely to save and invest are going up. Rather than extending the Bush marginal-tax-rate cuts on capital gains and other forms of investment, Washington will let that tax relief expire at the end of this year.

On top of this, Obamacare proposes to apply the 2.9 percent Medicare payroll tax on ordinary labor income to capital gains, dividends, interest, and profits from passive investments in partnerships and S-corporation small businesses.

Saving and investment are already double-taxed several times over. This includes the inheritance tax, which is slated to rise substantially next year. But taxing successful investors and earners is the exact wrong policy.

Alan D. Viard of the American Enterprise Institute writes that 2007 tax returns from households with incomes greater than $200,000 reported 47 percent of all interest income, 60 percent of all dividends, and a “staggering” 84 percent of all net capital gains. These folks are the economic activists, the ones most likely to reemploy their investment gains into new job-creating businesses. But these new tax penalties will blunt their investment activities, thereby reducing the demand for money. Of course, the whole economy will suffer as a result.

Even with the same volume of money in circulation, new tax penalties from Washington will lower money demand for investment purposes, making each new dollar printed by the Fed that much more inflationary. So the great risk is that rising tax rates will make the Fed’s bloated balance sheet even more inflation prone over the next few years. As many have noted, inflation itself is the cruelest tax of all.

The original supply-side model crafted by Robert Mundell and Art Laffer argued that low tax rates and a tight-money-linked sound dollar was the best path to maximizing economic growth. This model prevailed through the highly prosperous 1980s and 1990s. Launched by Ronald Reagan, it basically continued, with a few bumps here and there, through Bush 41 and Bill Clinton. But the dollar side of the model was badly broken during the 2000s, and at the moment, it looks like it may stay broken.

This is a crucial juncture. The Fed is going to encounter excruciatingly difficult problems as it deals with the magnitude and timing of its decisions to start withdrawing excess cash and raising the fed funds target rate. Markets should be the guideposts for these decisions, not the unemployment rate.

Janet Yellen, who served as a top economic advisor to President Clinton and was a Clinton appointee to the Federal Reserve Board, has for the past six years been the president of the San Francisco Fed. She is a very able economist. But if you work from the wrong money model, you are likely to get the wrong money results.

My Interviews with Mitch McConnell & Bob Corker

Here are my two recent Kudlow Report interviews on financial regulation and other pressing political subjects with Sen. Bob Corker (R-TN) and Sen. Mitch McConnell (R-KY).

On Tonight's Kudlow Report

This evening at 7pm ET:

MARKETS .. CHINA INFLATION .. CORPORATE BOND SPREADS .. U.S. HOUSEHOLD WEALTH .. TRADE DEFICIT

On board:

- Peter Navarro, "The Coming China Wars" Author; UC/Irvine Business Professor
- David Goldman, Senior Editor First Things Magazine

CORKER/DODD & FINANCIAL REGULATION
CNBC chief Washington correspondent John Harwood reports from Washington.

Senate Republican leader, Mitch McConnell of Kentucky, will be aboard to discuss financial regulation as well as the growing controversy surrounding high government pay.

OBAMA PUSHES TRADE INITIATIVE
NBC's Steve Handelsman reports from Washington.

OBAMA'S TRADE INITIATIVE - WILL THIS HELP OR HURT SMALL BIZ?
- Sallie James, CATO Trade Policy Analyst

DEBT THREAT: CALIFORNIA EDUCATION

CNBC's Jane Wells reports from Los Angeles.

The Wall Street Journal's Steve Moore will weigh in with his perspective.

Please join us. The Kudlow Report. 7pm ET. CNBC.