At a recent private dinner, five of six hedge fund managers and traders disclosed that their long positions (stocks they own) versus their short holdings were as high as they’ve ever been. The sixth noted that his firm’s long position was at a high for the year.

Several at the Connecticut meeting ascribed at least part of their apparent bullish fervor to what one described as “a real friendly Fed these days.” They believe that the Federal Reserve’s nonrestrictive policy will be sustained throughout this year, which bodes well for rising stock prices.

Sounds good, but some pros believe the market may be chasing a pipe dream. Why? Because the Federal Open Market Committee — which is expected to leave shortterm rates, or the Fed funds rate, unchanged at 5.25% today, the concluding day of its two-day meeting — may cause the market some unexpected anguish by not adhering to the sunny rate script in upcoming meetings, some Fed watchers suggest.

In particular, doubt is raised about the general Wall Street view, as indicated by Fed futures prices, that the Fed will ease rates three more times before year end — once in midsummer, another in autumn, and finally in December. In theory, those three reductions would knock down the Fed funds rate to 4.75%.

Merrill Lynch’s North American economist, David Rosenberg, is even more optimistic, noting in a recent commentary to portfolio managers that he expects four rate cuts from the Fed this year.

“Too aggressive” is how a former Merrill strategist, Bill Rhodes, reacts to such forecasts. “I don’t believe them,” he said. “I can’t see the Fed that accommodative.”

Mr. Rhodes is currently head of Rhodes Analytics, which doles out investment advice to a group of institutional investors with more than $1 trillion of assets under management. He figures that a combination of higher than expected inflation, heavy leverage in the household sector, and a stumbling dollar (down 6.6% year over year) is apt to make the Fed wary of living up to Wall Street’s rate-cut expectations.

Some Fed watchers think rate hikes, rather than rate reductions, could be more likely. A member of Chicago’s multibillionaire Harris banking family, John Harris, says he sees the Fed funds rate climbing to 5.5% or 5.75% by July or August because inflation is going up, not down. This trend will continue, he said, because higher petroleum prices should work their way through the whole system, including trucking, airlines, and the costs of food distribution.

Told that his rate-increasing forecast was at odds with consensus of Wall Street thinking, Mr. Harris replied: “Goody, goody for them, but I believe in looking at the real world. And if I’m right about inflation worsening, which I think I am, the market, which looks antsy to me, is going down.”

A professor of economics at the University of Maryland, Peter Morici, said he thinks there is a 50% chance of a Fed rate hike at a Federal Open Market Committee meeting in September or October. That’s based on a couple of ifs — namely that in the second half GDP will be growing at around 3%, and core inflation will be above 2.5%.

“I think they’re both good bets,” he said. As of now, the economy is growing at about 2%, and core inflation, over the past three months, grew at a rate of 2.6%.

An economist at Wachovia Corp., Mark Vitner, is also dubious about the consensus expectation of several rate cuts this year. In fact, he doubts there will be any cuts and sees the Fed funds rate wrapping up the year at its current 5.25%.

Noting that February’s consumer prices and producer prices both came in on the high side, he said he believes the Fed is more worried about inflation than a slowdown in the economy, which he thinks is likely to pick up momentum in the second half, given the likelihood of a perkier tone to business investments and housing.

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