Unlike a lot of economists, I've never truly believed that the Federal Reserve is really my friend, or a friend of financial markets and the economy.
 
True enough, I started at the New York Fed over 30 years ago and got a good education there. But frankly, I'd rather bet on America's free economy -- and the men and women who do the real heavy economic lifting by exercising their God-given talents to invent, produce, take risks and work hard at their jobs -- than bank on the Fed.

 This is provided, of course, that the U.S. government gets out of the way by allowing for sufficient after-tax rewards and incentives. Deregulate America, and U.S. capitalism will soar. Whether it's monetary or fiscal, central planning is the antithesis of prosperity.

 All of that said, a quick thought passed through my mind following the Fed policy meeting last week. I had just closed my eyes and leaned back while listening to some calm music, and I almost came to believe that the high priests of money might be basing their policy on forward-looking bond indicators, which is exactly what they should be doing. The question is: Will friendly thoughts like this last for very long?

 I still can't forgive the central bank for decimating and deflating the bullish stock market economy five years ago, a move that temporarily ended the great productivity surge of the Internet revolution. But perhaps they have learned a thing or two, and perhaps the arrival of the brilliant Ben Bernanke as Fed chair will be an occasion for real change.

 In shorthand, the Fed's policy statement last week strongly suggested that the recent 18-month tightening cycle soon will come to an end. It raised its target rate from 4 percent to 4.25 percent, and perhaps there's another small move or two left. But bond-market indicators have for quite some time been signaling an absence of inflationary pressures -- a matter confirmed by the actual data, where the basic inflation rate continues under 2 percent.

 Not only has the 10-year Treasury bond been hovering at a half-century low of 4.5 percent for many years, but the difference between this cash bond and its inflation-indexed cousin suggests that low inflation is here to stay for another decade.

 Moreover, broad-based inflation reminds me of Jimmy Carter. And despite the best efforts of the mainstream media, George W. Bush is no Jimmy Carter. Nor are these the inflationary Carter '70s. Lower tax rates and skyrocketing productivity are counter to inflation.

 Now, some of my supply-side friends take issue with my optimistic view on inflation. They believe the recent run-up in gold prices to over $500 an ounce signals excess money creation and much more inflation ahead. Therefore, some argue, the central bank must keep tightening and raising its target rate for at least another year.

 But I believe this is a 1970s view -- one that abstracts from the Internet Google revolution and the record productivity surge, and also ignores the global spread of capitalism, which has taken hold in the post-Reagan years and has increased the demand for scarce commodities across the board. Continued...