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I have had my FP set to 38 with vacuum line on.
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I have been adjusting it with the engine running and the line of.
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I'm not sure if you meant on or off, but you definitely shouldn't set it with the engine running and the line attached. This will give you a real high setting.
From what I read and hear, the Holley regulator isn't that great. Replacing it isn't necessary, but wouldn't hurt. Hooking the gauge to the Schraeder valve should work and would be preferable to cutting your fuel rails.
When you do fuel line work, trigger the fuel pump cutoff switch in the trunk and crank the engine over a few times to relieve fuel pressure.
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351W 89 Mustang GT Convertible