Every business cycle is different. This expansion cycle has been characterized by stronger-than-expected growth, and for far longer than anyone had anticipated. At the same time, it was generating less pricing pressure than our historic experience allowed us to reasonably foresee. Still, while the U.S. economy has undergone structural changes, those changes could not completely repeal the business cycle. Indeed, first-quarter GDP data released on Thursday indicate this business cycle is maturing and the Goldilocks-type conditions are coming to an end.

The 5.4% annualized growth rate was somewhat lower than the consensus had guessed. It was also off the 7.2% pace seen in fourth-quarter 1999. However, the composition of that growth will trouble the

Federal Reserve

. Consumer spending rose at its fastest rate in nearly two decades. Particularly noteworthy was the 26.6% surge in consumer purchases of durable goods, especially after a 13% rise in the fourth quarter of 1999. Consumer purchases of durable goods tend to be cyclical in nature and the sharp rise may reflect precisely what Fed officials have warned -- demand is rising faster than the productivity-enhanced output.

Market participants learned from Federal Reserve Chairman

Alan Greenspan's Humphrey-Hawkins

testimony that the key measure of inflation that the central bank monitors is the consumer expenditure deflator. That rose 3.2% at an annualized clip in the first quarter after the 2.5% pace in the fourth.

Greenspan has also repeatedly warned about tight labor markets and the shrinking pool of available workers. Nevertheless, wage pressures had remained quite low -- until now. There are all sorts of problems using the

Employment Cost Index

, also released on Thursday. The ECI is a proxy for wage pressures. For example, some commissions are picked up in the report which are not really evidence of wage pressures. If a realtor sells more homes, thereby earning greater commissions, should that really be included as an increase in labor costs? Even more important, the ECI makes no attempt to incorporate productivity.

The best measure of wage pressures is really the

Unit Labor Costs

report. Despite a modest acceleration of the Employment Cost Index, unit labor costs actually fell in the second half of last year. Nevertheless, the government reported a sharper-than-expected 1.4% first-quarter rise in the ECI. It reflects a small increase in wages but an even larger jump in benefits. The underlying story here appears to be that the one-off savings generated by the widespread adoption of HMOs has run its course.

In any event, the combination of data has prompted market participants to reassess the likely trajectory of Fed policy. In particular, the collective wisdom of the market foresees a greater chance of a 50-basis point hike at the May 16 Fed meeting. The price of the May

fed funds futures

contract reflects a 75% chance that the Fed will abandon its gradualism, hiking by a half point rather than its customary quarter point.

Following the more likely 50-basis point hike in May, the market foresees only a slight chance that the Fed will hike rates again at the late June meeting. However, the shape of the fed funds futures curve suggests that the market thinks political considerations (such as the national conventions or the November election) will not preclude another quarter-point hike at the late-August

FOMC

meeting. The market has that hike about 66% priced into the September fed funds futures contract. Although the December fed funds contract is too thinly traded to generate much insight, extrapolating from the euro-dollar curve, the market is pricing in the likelihood of a December rate hike as well.

The strength of the dollar in the foreign exchange market suggests that, unlike in 1994 -- the last time when U.S. monetary policy was in a serious tightening cycle -- foreign capital is not fleeing. Europe's single currency fell to record lows against the dollar, despite a

European Central Bank

hike of 25 basis points (even though the move came before the release of the U.S. data). The dollar also remained firm against the Japanese yen, trading in the upper end of its recent range. Indeed, the dollar's rise on a trade-weighted basis is yet another channel through which a tightening of monetary conditions is transmitted to the economy.

The equity market took the changing expectations of Fed policy largely in stride. The

Dow Jones Industrials

suffered, but the

Nasdaq

traded higher. The

Wilshire 5000

, the broad measure of equity capital that the Fed monitors, rose 0.7%. The tightening of monetary conditions in the U.S. would suggest that the strength of corporate balance sheets may become a more salient consideration for investors. It also suggests, in particular, that those companies with high debt levels may be more vulnerable in the period ahead.

Marc Chandler is the chief currency strategist for Mellon Bank. At the time of publication, he held no positions in the currencies or instruments discussed in this column, although holdings can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

chandler.m@mellon.com.