Fed Bullish, Not Dovish

Treasuries have been weakening in price and rising in yield for the past two months as consumer spending, trade and employment growth keep rolling in to reveal a strong economy. But it would take higher inflation, or more sublime above-trend growth, to send bond yields to their next level, writes Tony Crescenzi, chief fixed-income strategist at Miller Tabak.

On inflation, it would be a mistake to believe the Fed has backed off in its vigilance. In saying "some inflation risks remain" and that "the high level of resource utilization has the potential to sustain inflation pressures," the Fed's depiction of inflation certainly doesn't stamp out its tightening bias.

"I would focus on the word 'modestly' as evidence that the Fed is not satisfied in the improvement on inflation, which in December was characterized as 'elevated,' " writes Crescenzi. "It stands to reason, then, that a modest improvement of anything that has been elevated is still largely elevated."

Also, core inflation, while moderating, has been running above the Fed's 1%-2% comfort zone for several months. Likewise, the risk premium on inflation-protected Treasury notes is creeping up, notes Randy Diamond, trader at Miller Tabak. Friday's payrolls report for January, which provides a read on average hourly earnings, will offer more insight into wage inflation.

Ultimately, the sum of the statement's message reminds investors of something Ben Bernanke has been trying to communicate for months: The Fed shapes its monetary policy more on the basis of inflation's trends than growth trends. On Wednesday, both were moving to the market's liking.