Treasury prices stumbled in confusion last week after the Federal Reserve snatched the easing carrot from in front of the market's face, but analysts said in the long run, the Fed's restraint should benefit long-term security prices.

Tuesday's report of a 17% drop in April housing starts raised hopes that Fed policymakers would approve another 25 basis point cut in the funds rate target, to 3.5%, at that day's Federal Open Market Committee meeting.

Instead, The Wall Street Journal reported Thursday morning that Fed officials had voted to hold policy steady and also switched to a neutral policy directive instead of maintaining the bias toward easing that had been in place for most of the last two years.

Economists said the shift to a symmetrical directive still allows the Fed to ease policy in the months ahead, but suggests policymakers would need to see more alarming evidence of economic weakness to move rates lower.

The Treasury market swooped lower Thursday as the market repriced itself to account for the decreased possibility of a Fed ease, then bounced higher during Friday's shortened trading session.

Neutral Fed policy is clearly negative for the short end, where prices are closely aligned to the funds rate, but analysts said the long end eventually should do better as it realizes the Fed's restraint is to its ultimate benefit.

"The Fed's recent polishing of its hard-won reputation as an inflation fighter will only augment investor demand for long-term bonds," said John Lonski, senior economist at Moody's Investors Service. "If the Fed strives to contain inflation, a protracted, though unspectacular, bond rally could be under way."

Douglas Schindewolf, an economist at Smith Barney, Harris Upham & Co., is also bullish on bonds.

"Over time, I think the long end will take this decision constructively because it appears the Fed is back to a very cautious mode with a focus on inflation, after a period of focusing primarily on economic growth," he said.

Mr. Schindewolf expects the 30-year yield to return to the 7-3/8% to 7-1/2% area it visited briefly early this year and said short-term prices can improve as well.

Even though investors at the short end cannot count on another Fed easing, they still enjoy yields that offer a generous advantage over the funds rate, he said, "so I think the whole yield curve can ratchet down."

Lynn Reaser, chief economist at First Interstate Bancorp. in Los Angeles, is less optimistic about Treasury yields.

She sees a risk that economic indicators in coming months will show a healthier recovery than many market participants expect.

The news would hurt short-term prices most, while the 30-year yield might gravitate back to 8%, Ms. Reaser said.

Julian Callow, an international economist at Chase Securities in London, also expects some erosion in long-term prices.

"The economic data are going to continue to look better, which makes further rallying difficult, and I suspect the market might run into a bit of profit taking," he said. "It will only really be if we get some good news on the inflation front that the Treasury market will be able to rally a further length from here."

Analysts expect this week's indicators to come in on the strong side.

The Conference Board's May consumer confidence report to be released this morning is expected to rise, and the consensus forecast calls for a small increase in tomorrow's report on April durable goods orders to show a small increase, although economists warn that series is full of surprises.

Thursday's revision to first-quarter gross domestic product is expected to show growth was closer to 3% than the 2% reported last month, mostly because inventories increased much more than the government estimated originally. But analysts said the market expects the upward revision to first-quarter growth and has already accounted for it in prices.

Friday's Activity

Treasury note and bond prices ended Friday's shortened session with gains of 1/8 to 1/2 point, but traders said the rally may have been exaggerated because flows were so thin.

The 8% 30-year bond closed 1/2 point higher, where it yielded 7.82%.

Friday's improvement erased a large part of the losses that occurred Thursday when the market became convinced the Fed would hold policy steady.

Friday's rally started during the Tokyo session and continued in London and New York.

Both the cash market and futures trading at the Chicago Board of Trade closed at 1 p.m., EDT, Friday, and were to be closed Monday for Memorial Day.

Retail buying and dealer short-covering both played a role, and there were rumors of a large purchase of long-term strips, traders said.

"Bonds trade extremely well, especially against the rest of the curve," a bond trader said.

The trader said most participants are still hoping to see a 7-1/2% yield on the 30-year bond. He views that as unlikely, though, citing the Treasury's continuing need to issue lots of debt and the possibility that the Fed easing over the last couple of years will eventually trigger an upswing in inflation.

The June bond futures contract closed 5/16 higher at 100-27/32.

In the cash market, the 30-year 8% bond was 1/2 point higher, at 101-30/32-102-2/32, to yield 7.82%.

The 7-1/2% 10-year note rose 9/32, to 101-101-4/32, to yield 7.33%.

The three-year 5-7/8% note was up 7/32, at 100-5/32-100-7/32, to yield 5.79%.

In when-issued trading, the 5-1/8% two-year note was 5/32 higher at 99-24/32-99-25/32 to yield 5.24% and the 6-3/4% five-year note was up 11/32, at 100-6/32-100-8/32, to yield 7.02%.

Rates on Treasury bills were mixed, with the 3-month bill unchanged at 3.69%, the 6-month bill one basis point lower at 3.79%, and the year bill off six basis points at 4%.

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