Fed Juggles; Stocks Run in Place

Follow the bouncing ball, says Ben Bernanke and the Federal Reserve.

The Federal Open Market Committee completed 2006 by telling investors to follow the data just as they would follow the bouncing ball when singing along to a Christmas carol on television. That's what the Fed is doing. To wit, the central bank toed a careful line Tuesday by acknowledging slower growth, but maintained a tightening bias.

Stock, bond and currency markets staged a relatively muted response to the FOMC decision to remain on pause with the fed funds rate at 5.25%. That said, the markets took the Fed's minor addition to the accompanying policy statement as slightly more dovish.

The Fed added the word "substantial" to its assessment of the housing market. But the Fed also said that the markets shouldn't just watch housing. "Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market," reads the statement.

The statement also noted that recent indicators have been "mixed," and that "on balance" the economy will expand at a moderate pace over coming quarters.

"The Fed was acknowledging the obvious," says Ethan Harris, chief economist at Lehman Brothers, who forecasts that the slowing housing market will subtract more than 1% from growth in the third and fourth quarters. "They don't want this to be a signal," says Harris.