Whether you are a monetarist or not, if you own bonds you have got to be happy. With the monetary aggregate M-1 being stuck for the past four months, the Federal Reserve began to smell recession unless that key aggregate did not begin to grow.

The economy was decelerating, and any monetarist will tell you that if you want the economy to perform, you have to have M-1 growing. Because people are convinced that we cannot afford another recession, the Fed adroitly went to work, supplying as few reserves to the banking system as possible to influence the decline of short-term rates. In so doing, the Fed hoped to get M-1 off dead center as well as give the economy a boost.

Time will tell how successful the Fed's actions have been, but interest rates have declined dramatically since the end of August. The weekly average federal funds rate has declined about 100 basis points -- a basis point is 1/100th of a percentage point. The weekly average three-month commercial paper rate is down 59 basis points, while the weekly average three-month certificate of deposit rate has declined 60 basis points. The administered prime rate has dropped from 13 percent to the 12 percent level. These weekly averages do not tell the whole story. Based on the high-low numbers, the federal funds rate has plummeted about 250 basis points, that for commercial paper 200 basis points, and that for certificates of deposit 200 basis points.

As might be expected, this period of softening interest rates has brought forth a host of new bond issues. From the first of September until Oct. 26, approximately $11.2 billion worth of tax-exempts have been marketed, $9.5 billion worth of corporate issues and $156 billion worth of U.S. Treasuries.

The much improved psychology that goes along with a bond rally made it relatively easy to handle this large amount of new offerings. Should the rally continue, a greater amount of new corporate bond issues may be expected.

But in all such rallies, certain key questions arise. Is the rally real? How low will rates go? How far into the rally are we, or, put another way, is it too late to get involved? Underlying all of these questions is the $64,000 question: To what level will the federal funds rate have to decline to enable the Federal Reserve to accomplish its strategy of stimulating M-1 growth?

Unless the economy is in horrible condition -- and that obviously does not seem to be the case -- the federal funds rate could be close to its low in this rally. However, the funds rate may have to be kept at these levels for several weeks before other interest rates, such as mortgage rates, decline further. In the meantime, the markets are confused over what should be the proper federal funds level, and a degree of indigestion from all the bond issues seems to be setting in. A nice jump in M-1 this week didn't help to clear up the confusion. In any case, the Fed giveth and the Fed taketh away, and if rates are to go lower, the markets soon will know.