Stocks Like Bernanke Banter

He gave a nod to increasing defaults in the subprime mortgage market, but noted that the "healthy labor market" and rising real incomes should help keep household finances in decent shape.

The cyclically sensitive elements of the market reflected Bernanke's upbeat outlook for economic growth. The Morgan Stanley Cyclical Index closed at a new high, up 1.2% on the day. Components Caterpillar(CAT Quote), FedEx(FDX Quote), United Technologies(UTX Quote), and Honeywell(HON Quote) all advanced at least 2%. Deere(DE Quote) jumped 10% on its strong earnings report.

As for inflation, Bernanke was his usual vigilant but data-dependent self. Traders honed in on: "As I noted earlier, there are some indications that inflation pressures are beginning to diminish." But, he added that "the monthly data are noisy," and "it will consequently be some time before we can be confident that underlying inflation is moderating as anticipated."

While most analysts would say that Bernanke toed the Fed's now almost boiler-plate message, his comments managed to please both the stock and the bond markets.

Indeed, the argument between stock and bond markets about the future of Fed policy may be kicking up again. The pessimistic bond market saw a green light to price in rate cuts, while the stock market saw pure gold -- Goldilocks, that is.

Throughout much of the seven-and-a-half-month-long stock market rally, the Treasury bond market was pricing in several rate cuts, betting that the economy might even slip into a recession.