For months now, there has been growing sentiment on Wall Street that the Federal Reserve’s agonizing trend of raising short-term interest rates is about to end. So far, the Street has been dead wrong, but it has doggedly stuck to its guns, culminating in the belief that the Fed will finally loosen its credit reins at the June 28-29 meeting of the Federal Open Market Committee.

Apparently, many investors believe it. During a two-week period that ended May 10, eager stock players went on a spirited buying spree, snapping up an estimated $15.9 billion worth of equity mutual funds.

“Dumb thinking; these people are buying a pipe dream,” a Los Angeles day trader, Arnold Silver, says. In early May, he did a considerable amount of selling in his managed accounts, largely based on an opposite point of view. Given last week’s two-day thumping, during which the Dow plummeted nearly 262 points, or more than 2.25%, and Wednesday’s decline of 214 points in response to a higher than expected April reading in the Consumer Price Index, his selling was well timed.

That “pipe dream,” he tells me, is the widespread notion that the days of rising short-term interest rates are just about over. Coinciding with this view is a growing belief that the Fed will pause at the next meeting of the FOMC, which should verify that happier days lie ahead on the rate front.

Mr. Silver doesn’t buy it. While he believes a pause is possible, he thinks that if there is one, it would be temporary at best, given what he sees as a robust economy, accelerating global growth, renewed signs of inflation, and high energy and other commodity prices. His outlook: The fed funds rate, currently at 5%, will be raised at least two more times, 25 basis points in each instance, before any Fed pause.

“If the Fed should pause at the June meeting,” he says, “it would send a worrisome signal to the financial markets that it’s easing up on its inflation vigil,” which, he argues, “seems an unlikely course of action.” That’s not what the markets want to hear or expect, he says. So, given what he anticipates will be some disappointing news on the rate front sooner rather than later, he decided to fatten his clients’ cash reserves.

“We just had two market hurricanes; I want to avoid what could be another one,” he says.

To support his thinking, Mr. Silver points out that Fed governors at their last meeting hinted additional “firming” may be needed to keep prices in check. In addition, he says, “In light of the disappointing CPI report for April, I think if people are waiting for the Fed to ease soon, they shouldn’t hold their breath.”

Larry Schwarzwalder, the treasurer of Tishman Realty & Construction, one of the city’s leading developers, agrees. He also thinks expectations of a Fed pause next month are ill founded, considering the strength of the economy and the high energy prices. Quarterpoint rate hikes are what he expects in June and August. Then, he says, a pause is possible. “But if such gauges as the PPI and CPI” – the Producer Price Index and Consumer Price Index – “indicate any inflationary signs, then all bets are off because there will be no pause,” he says.

Meanwhile, the chief economist of Bear Stearns, David Malpass, also raises the possibility of a more hawkish Fed, expressing concern that it has not taken adequate steps to address growing inflation expectations. Mr. Malpass sees inflation rising this year and remaining elevated in 2007. Elevated inflation, he says, implies elevated interest rates, which have negative implications for stocks and bonds.

While many Wall Streeters are debating the market impact of the Fed’s future rate action, the chief investment strategist of northwest regional brokerage D.A. Davidson & Company, Fred Dickson, thinks investors would be well advised to address themselves to the effects of past rate action as well. Why so? Because he says that rising rates, coupled with high energy prices and some inflation, are already taking their toll on the market. He says he believes the market is in the midst of a pullback that by late September will produce a decline between 5% and 7% in both the Dow and S&P 500 and a drop between 10% and 15% in the Russell 2000 index. He expects the Fed to raise rates next month and then pause in August.

Finally, the chief investment strategist of Raymond James Financial, Jeffrey Saut, notes that each time the Fed has raised the discount rate to 6%, which it did last week, it has spelled trouble for stocks.

dandordan@aol.com