With crude prices declining four days in a row, stocks are finding some room to run. On Wednesday, oil futures fell almost 4% to $43.47 a barrel and equities responded with a late-afternoon surge.

The

Nasdaq Composite

gained 1.3%, while the

S&P 500

and

Dow Jones Industrial Average

each climbed 0.8%. Amid crude's 9%, four-day mini-slide following its record-breaking run for much of August, the Nasdaq has now gained a shade over 2% while the Dow and the S&P are up over 1% each.

But even with oil falling and stocks rebounding, Wednesday's economic reports contained some troubling signs, raising anew questions about the outlook for monetary policy.

First, the Commerce Department's report on durable goods showed that, save for some big aircraft orders, businesses aren't generating much demand. Orders rose 1.7% in July but only 0.1% excluding transportation. Still, it wasn't a horrendous report as the headline number bested consensus, inventories increased for the eighth straight month, and unfilled orders rose 1.2%.

Second, and perhaps more surprising, was the department's reading of new-home sales. Not only did sales in July slide 6% to an annual rate of 1.13 million, but the rates for May and June were also revised lower. Again, it was hardly a total disaster as sales are still running 4% above 2003's average rate and inventories remain at historically low levels. But the top-line decline was more than Wall Street had predicted, prompting a slide in housing and related shares.

KB Home

(KBH) - Get Report

and

Pulte Homes

(PHM) - Get Report

each lost 1%, while

D.R. Horton

(DHI) - Get Report

lost almost 2%. Luxury home builder

Toll Brothers

(TOL) - Get Report

reported great quarterly results, with revenue growing 46% and net income increasing 55%. But it wasn't enough to fend off the bad news and the shares, up 46% over the past year, lost 1%.

The day's two economic reports, and recent chatter from

Federal Reserve

officials, has given the market more fodder to ponder the likelihood of further rate increases this year. Futures markets are still indicating a better-than-even chance the Fed will raise rates by one-quarter of a percentage point at two of its remaining three meetings in 2004. That would put the benchmark federal funds rate at 2% by Dec. 31.

Some economists, like Merrill Lynch's David Rosenberg, see a reduced chance of a Fed hike in September, due to the weak data in recent weeks and pronouncements from some central bank officials over the past few days.

Recent speeches by Minneapolis Federal Reserve Bank President Gary Stern, Dallas Fed President Robert McTeer and, most especially, Fed Governor Ben Bernanke, suggest "at the margin, there may be a change in tone taking place at the Fed -- one that is less hawkish," Rosenberg wrote in a report out Tuesday.

Stern trimmed his growth forecast slightly and McTeer said the economy's weak spot was extending beyond the second quarter. Bernanke, in a speech on Monday, said the Fed could "respond to the weakening of the economy associated with an oil price increase so long as we are confident that inflation will remain stable."

Those could all be signals that the Fed sees less need to raise rates, Rosenberg wrote.

He also argued that twice in recent memory the Fed abandoned its assessments of economic strength and quickly cut interest rates on the basis of weak economic data. It happened in 1997-98 and again at the beginning of 2001.

Rosenberg certainly has a point in the more recent example, as the Fed's expectation of continued robust growth was undone by the popping of the technology bubble.

But in 1998, the Fed was reacting to the Russian default crisis and problems at hedge fund Long Term Capital Management. As Greenspan himself explained a year ago in a speech at Jackson Hole, Wyo., the Fed was still worried on balance about a strengthening economy in 1998. However, the risk of damage from lack of liquidity due to the debt crisis was far greater than the potential damage from a little further stimulation of the economy.

Using Greenspan's "risk management" approach, the Fed doesn't just consider the likelihood of different economic outcomes. It also takes into account the potential impact of each scenario. A less-likely but more damaging outcome was most compelling in 1998, Greenspan explained.

Using the same approach now, the Fed is likely to keep raising rates even with the economy's "soft patch," according to Pierre Ellis, senior international economist at Decision Economics in New York.

"The Fed has been saying that rates are unsustainably low and need to be brought back to a neutral level," Ellis said. In other words, the bigger danger is that the economy will overheat -- not that growth will be choked off.

Notably, another Fed official, Atlanta Fed President Jack Guynn, weighed in Wednesday with a much more hawkish tone on inflation, implying more rate hikes are still being planned.

In a speech to a paper industry group, Guynn also engaged in the risk management approach. While there has clearly been some softness in the economy, the risk of the Fed keeping rates too low could do more damage, he said. The recent weakness "is more fleeting than fixed," he added.

Guynn also said inflationary price increases may be percolating beyond oil, echoing comments

here on Tuesday.

"While many of the increases associated with high prices for oil and other commodities should reverse in time, I continue to be struck by the extent of cost pass-through," Guynn said. "In fields where demand is strong and growing, we are seeing price increases beginning to stick."

Greenspan also revealed that his economic outlook is little changed in a letter he sent to the Senate Banking Committee that was dated Aug. 17 and released on Tuesday. The economic recovery "has become both stronger and more sustainable" worldwide, he wrote.

That said, if the August payrolls report due next week shows a third consecutive month of less-than-robust job growth, Rosenberg's case for a rate hike hiatus would become a lot stronger. "All we can say is that if we see a number at the low end of

the consensus range of 50,000-250,000 non-farm jobs, it will mark the third month in a row of 'employment disappointment' ... and could well put this nascent tightening cycle on ice," Rosenberg wrote.

Greenspan is scheduled to speak at this year's Jackson Hole meeting on Friday. Perhaps the maestro will reveal more of how he plans to conduct the economy.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

your feedback.