WASHINGTON -- Thre is still plenty of room for the bond market to move to higher ground and bring interest rates down, even though the Federal Reserve declined to ease monetary policy Friday, financial analysts say.

The Fed drained reserves from the banking system when the federal funds rate was trading at around 5 1/8% by conducting four-day matched sale-purchase agreements with dealers. The action was seen in the market as a "rate protest" -- a clear signal that Fed policymakers are still targeting a funds rate of 5 1/4%.

"It's always the Fed's job to spoil the party," said Tony Riley, director of economic research for Shilling & Co.

But analysts said Friday's lackluster retail sales report by the Commerce Department and another week of falling money supply figures leave the door open for a move by the Fed to cut the funds rate to 5% in the near future. Hopes for an easier monetary policy also were boosted by a separate report from the Labor Department that showed producer prices in September rose only 0.1% less than the market expected.

"The back of inflation has been broken," said James Coons, chief economist for the Huntington National Bank in Columbus, Ohio. "There is no inflation at the producer level, and, in fact, it is down. The conclusion that I draw from this is it's just a matter of time before bond yields follow inflation down in a big way, and it may be sooner rather than later."

Lawrence Chimerine, president of Radnor Consulting Services in Wayne, Pa., said, "I still think we're going to s ee some easing in the next month or two. The economy is in the early stages of an extremely slow and erratic recovery. There is a sizable risk that the recovery is stalling, and that is what has the attention of the Fed."

Other economists said they think there is a good chance the Fed will move this week to again loosen the reins on credit. Several noted that Federal Reserve Board Chairman Alan Greenspan was in Bangkok, Thailand, to meet over the weekend with his central bank counterparts and finance ministers of the Group of Seven industrial nations.

The G-7 meeting would serve as a forum for Treasury Secretary Nicholas Brady to press Japan and Germany for lower rates, although neither nation is likely to respond, said Darwin Beck, managing director for First Boston Corp. Once the pitch is made, the Fed will be clear to ease again, Mr. Beck suggested.

Analysts said the Commerce report -- showing retail sales in September advanced 0.7% -- was not as good as it looked on the surface. The increase followed a revised decrease of 0.6% in August, which meant that sales were largely unchanged since July.

Moreover, the rise in last month's sales was concentrated in the automobile sector, which tends to be volatile. Excluding autos, sales advanced a meager 0.1%, and sales of nondurable goods were unchanged for the second month in a row.

The producer price index report showing a 0.1% increase in September was even more encouraging to the market, reinforcing the view that inflation is on the run. In the past 12 months, the index was up only 0.7%, continuing a steady decline in year-over-year increases from 4.0% at the beginning of the year. Excluding food and energy, producer prices were unchanged.

Some analysts said the Fed may wait until money supply figures and the consumer price index are released on Thursday. The consumer price report is expected to provide more good news on inflation. So far this year, consumer prices are upt at annual rate of only 2.7%.

The M2 measure of money fell again last week, keeping it below the target range of 2.5% to 6.5% in annual growth sought by policy-makers. Since May, money supply has been essentially flat, Mr. Beck said.

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