Once feared like a plague in the bond market, tighter monetary policy is now being embraced as a cure to the market's ills.

After months of frantic selling on fears that the Federal Reserve would raise short-term interest rates, bond market participants have suddenly cozied up to the idea.

Amid signs that the U.S. economy continues to navigate a steady path toward full capacity and evidence that price pressures are stirring, fixed-income investors are depending on the central bank to tighten credit conditions and renew its vow to keep inflation under wraps.

"From the market's perspective, a tightening is not only justified, it is necessary," said Charles Lieberman, director of financial markets research at Chemical Securities Inc.

Market observers generally expect the Fed to raise short-term interest rates at tomorrow's meeting of the Federal Open Market Committee. The only debate among bond market analysts is how much the Fed will raise rates, not whether they will.

Most generally expect the Fed to raise the federal funds rate target by 50 basis points to 4.75%, which they say would help calm nerves in the bond market even more. However, a number of market participants are calling for a 25 basis point move.

In recent sessions, players have come to grips with talk that the Fed may only move by 25 basis points. Many observers believe a quarter-point hike in the funds rate would increase uncertainty because it would leave the prospect of additional tightening hanging over the market.

"A 50 basis point move would help instill confidence and help the market trade better," said Robert Brusca, chief economist at Nikko Securities Co. At this point in the business cycle, he said, "it's better to raise rates more than less."

Analysts believe a strong dose of tightening would lift the long end of the Treasury market out of its recent slump. An aggressive move by the Fed would relieve much of the overhang from last week's refunding auctions, they said, noting that much of the $40 billion of new government debt sold then has yet to be distributed in the marketplace.

If there is no rate increase this week, the long end could sell off as investors move money in on the yield curve to avoid volatility caused by fears of future inflation, they said.

Not all Wall Street analysts subscribe to the 50 basis point scenario. A growing number believe an aggressive tightening would unnecessarily raise warning flags in the market that inflation is rising faster than conventional measures currently suggest.

The analysts argue that the more gradual increase of a quarter point in the funds rate target would allow the Fed to send a message of restraint to the bond market, while at the same time giving it room to analyze upcoming reports on the economy and decide on the proper level for short-term rates.

"A 50 basis point move could engender some thought that inflation is increasing and that the economy is stronger than we now know " said Donald Fine, chief market analyst at Chase Securities Inc. "If we see a move like that, people in the market might wonder what the Fed is seeing that they don't."

Marilyn Schaja, money market economist at Donaldson, Lufkin & Jenrette Securities Corp., also thinks the Fed will raise the federal funds rate by 25 basis points this week. Some signs of weakness in the economy are likely to dissuade the central bank from being more aggressive in pushing up the rate by 50 basis points, she said.

Inflation reports released last week failed to alter fixed-income analysts' view of the economy.

Treasuries surged Friday on news that consumer prices increased only at a moderate pace in July. The Labor Department reported that the July consumer price index rose 0.3%, and that the core rate, which excludes the volatile food and energy components, climbed 0.2%.

While the figures were generally within expectations, some players had been expecting much higher price increases and scrambled to cover short positions after the numbers were released. Participants also noted a moderate amount of retail buying interest in the market.

The 30-year bond ended up almost 3/4 of a point Friday, to yield 7.49%. The issue has been up over a point at times during the session.

To most fixed-income observers, the July inflation series confirmed that the Fed will raise short-term interest rates this week after tomorrow's FOMC meeting.

With rising industrial commodities and the Fed's stated policy of looking for inflation down the road, observers expect a tightening despite the generally benign inflation numbers released last week.

Analysts wondering how close the economy is running to capacity will keep an eye on today's July industrial production and capacity utilization reports. Neither release is likely to change the Fed's view of the economy, but the figures will nonetheless play a role in deliberations on monetary policy, they said.

In the futures market, the September bond contract ended up 23/32 at 102.25.

In the cash markets, the 6 1/8% two-year note was quoted late Friday up 1/32 at 99.25-99.26 to yield 6.22%. The 6 7/8% five-year note ended up 7/32 at 99.20-99.22 to yield 6.95%. The 7 1/4% 10-year note ended up 16/32 at 99.21-99.25 to yield 7.28%. The 7 1/2% 30-year bond ended up 22/32 at 99.31-100.03 to yield 7.49%.

The three-month Treasury bill ended up two basis points at 4.45%. The six-month bill closed down one basis point at 5.08%. The year bill ended unchanged at 5.56%.

Corporate Securities

The primary market for corporate securities ground to a halt last week as issuers and investors wondered whether the Fed would raise short-term rates this week.

With intermediate- and long-dated treasuries feeling the weight of new supply from the August refunding, corporate debt issuers kept their offerings on the shelves. Also, few investors were willing to risk taking positions ahead of a possible monetary tightening this week.

In the secondary market for corporate securities Friday, spreads of investment-grade issues tightened by about 3/4 of a point, while high-yield bonds generally improved by 1/2 of a point.Treasury Market Yields Prev. Prev. Friday Week Month3-Month Bill 4.45 4.56 4.356-Month Bill 5.08 5.08 4.851-Year Bill 5.56 5.56 5.332-Year Note 6.22 6.20 6.013-Year Note 6.58 6.48 6.365-Year Note 6.95 6.92 6.837-Year Note 7.11 7.07 7.021-Year Note 7.28 7.26 7.2330-Year Bond 7.49 7.54 7.54

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