There were few surprises and next to no fireworks when the Fed announced last week that it was leaving its policy rate unchanged at 5.25%.

Ben Bernanke, chairman of the Fed, had flagged the idea of a pause in the pattern of increases in both April and July, winning the market's approval the second time around.

US central bankers opted to stand still even though "some inflation risks remain, " according to a statement from the Fed. If those risks were qualified as "many" instead of "some, " then policy makers should and would have raised rates again.

Instead, the Federal Open Market Committee said it expects price pressures to moderate over time, a result of "contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand."

While the statement appeared less hawkish than one might expect at a time when every inflation measure is well above the Fed's comfort zone (a ceiling of 2%), the Treasury market took it in its stride. The benchmark 10-year note did not budge, while the prices of interestrate futures contracts and short-term Treasury notes rose modestly.

There was nothing in the statement to suggest that the Fed was calling a halt in its campaign to normalise the federal funds rate, which stood at 1% in June 2004. But that's still how events are likely to play out.

Leaders Lead Why? The behaviour of certain economic indicators . . . not on a one-month basis but over a longer period . . . suggests that the interest rate increases in recent months are starting to bite.

Let's start with that forward-looking relic, the Index of Leading Economic Indicators. It's the gauge everyone loves to ignore except when it supports his forecast.

The LEI has been losing altitude for almost three years. Using the six-month annualised change, the measure preferred by the business cycle gurus at the Conference Board, keeper of the index, the rate of growth peaked in July 2003 at 10.8% before falling to -0.6% in June 2006.

And the LEI is called the leading index for a reason . . . really. It has proved itself as a predictor of economic activity down the road.

With a lead time of eight to nine months, the index has been edging lower since its peak in January. There is no reason to expect a pick-up in economic growth with the LEI rolling over.

Then there's our old friend, the spread . . . or the yield differential between the funds rate and long-term interest rate.

The spread has been inverted since late June.

While the magnitude is still modest by historical standards, the message is that the policy rate is no longer stimulating the economy.

Coincident Slowdown Yield-curve deniers protest that the shape of the yield curve is irrelevant because interest rates are low, and that inflation-adjusted interest rates are well below previous business-cycle norms required to slow economic growth.

You would think if real rates were such a good leading indicator, someone would have figured it out by now and put them in the LEI.

The economic slowdown signalled in leading indicators is already starting to show up in current data. Those components of gross domestic product that are especially sensitive to interest rates (consumer spending on durables, investment in equipment and software, and housing) all posted a decline in the second quarter of 2006 for the first time in 15 years, according to Joe Carson, director of global economic research at AllianceBernstein Holding in New Yo r k .

What's more, US employment growth has slowed to an average of 112,000 in the last four months from 145,000 in the last year.

And while the difference of 33,000 may be a rounding error in a non-agricultural labour force of 142 million, the error (if it is one) has been consistently in one direction.

Real Money "The recent muted pattern in employment resembles the months following the end of prior tightening campaigns, not the ones leading up to their conclusion, " economists at Citigroup wrote in the company's Comments on Credit last week.

Slower growth doesn't imply a lower inflation rate in an of itself. That best-forgotten decade, the 1970s, demonstrated all too well that higher unemployment and accelerating inflation can walk hand in hand rather than trade off each other.

Money growth, the source of all inflation, has slowed in fits and starts in the past few years.

M2, the broad monetary aggregate, rose 3.1% (on an annualised basis) in the last three months, down from 7.3% in the first three months of the year. With inflation, as measured by the consumer price index, rising 4.3% in the last year, real money growth is negative. Take a guess what that means.

So there is good cause to think inflation will abate over time for reasons independent of slower economic growth.

As for inflation expectations, which Bernanke views as an independent driver of inflation, it remains to be seen whether they will stay contained even as reported inflation forces itself out of its container.