To ease or not to ease? That is the big unknown overhanging and dominating the bond markets.

The heart of the matter centers on the intention of the Federal Reserve in handling the recession. Or to put it another way, when will the Fed stop fighting inflation, and how earnestly will it fight the recession? The answer to this question will determine the near-term direction of the markets.

Peter Gordon of T. Rowe Price in Baltimore expressed it best when he said, "Whether or not the Fed makes credit easier will depend on its perception of the recession. If it feels that the recession will be steep -- then the Fed will ease.

"But if it feels the worst is over and the economy is plateauing, then the Fed will probably hold to its present course and not ease further."

If the Fed anticipates a steep recession and eases credit, shortterm rates would move lower, and more than likely, long rates would be nudged lower, too.

Conversely, should the Fed perceive that the recession is bottoming, no further easing would occur. And this would spell trouble for the markets; the spectacular rally rhat began last spring would definitely be over.

The technical factor of supply has been pounding the markets slowly into retreating from their high price levels that were reached in mid-June. Retail buyers have headed for the hills and the dealers are being inundated with merchandise.

A Philadelphia municipal salesman offered this comment: "The velocity of the market has diminished so much. Heavy inventory looked reasonable when bonds were trading readily. But now dealers are choking with bonds.

In the corporate area last week, the $400 million Dow Chemical long bond was priced to return 11.35 percent. Unfornately that was not enough yield and the issue was only one-third sold the first day.

Meanwhile rumors of pending new corporate issues -- $1 billion General Motors, $1 billion IBM and $500 million Getty Oil Co. -- depressed the corporate market further. This was followed by a surprising "up" number for retail sales in June (Wall Street was looking for a "down" number) and gave credence to the idea that the economy could be leveling and the Fed would not ease.

The supply continues in the municipal area as well. By the end of August, more that $1 billion in power authority revenue bonds will be sold, with an additional $750 million scheduled for September. This should lead to lower prices in the power bond sector.

The Treasury will have its shot, too. The weekly Treasury bill auctions have been increased to $8 billion, with $1.2 billion of that new money. By way of contrast, last January the weekly auctions totaled $6.4 billion, which included $350 million of new money.

A $4 billion, two-year offering should be announced this week. Around July 30, the Treasury will give the details on its quarterly refunding. This financing should total $7 to 8 billion.