Beware Post-Fed Rally

The Federal Reserve answered the market's cry for it to acknowledge inflation, but also to acknowledge the risks of more rate hikes to the slowing economy. The result was a sharp rally in stock and bond prices.

The Dow Jones Industrial Average was up about 86 points ahead of the Fed's 2:15 p.m. EDT announcement; it jumped to triple-digit gains as soon as the statement came out. The Dow ended the day up 2%, or 216.44 points, at 11,190, while the S&P 500 gained 2.1% to 1272.39; the Nasdaq Composite climbed 2.8% to 2170.53.

"In the short term, [the Fed statement] was exactly what the market wanted to hear," said Drew Matus, senior economist at Lehman Brothers.

But recent history suggests every time the market perceives the Fed as becoming more dovish, the central bank comes out and tells the markets they got it wrong.

Ben Bernanke came out and said so directly to CNBC's Maria Bartiromo after his congressional testimony in April. And, after markets interpreted the word "yet" as dovish in the May 10 FOMC statement, the Fed came out and stunned the market with intense inflation-fighting rhetoric. Thursday's statement can only be read as more dovish than expected, and allowing flexibility for a possible pause. But investors should be cautious about counting on it.

The Fed added another 25 basis points to the fed funds rate, as was widely expected, bringing in the funds rate to 5.25%.

"Readings on core inflation have been elevated in recent months," reads the accompanying statement, adding that "the moderation in the growth of aggregate demand should help to limit inflation pressures over time."

On the question of further hikes, the Fed said it will remain data dependent, but the language was less formulaic. Thursday's statement reads: "The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."