Fed Doves Rally Bulls

"Traders may start to lean toward believing June could be the first rate cut, as opposed to August, but the market won't really start to believe that until there is more data to support it," says Marc Pado, chief market analyst at Cantor Fitzgerald. The fed funds futures market prices in a 40% chance of a cut in June, up from 24% odds prior to the FOMC statement. For August, the market now puts 85% odds of a rate cut, up from 65% before 2:00 p.m., according to Miller Tabak.

In the first part of the statement, the Fed "marked to market" its assessment of growth and inflation, as Lehman Brothers' chief economist Ethan Harris put it. On the growth side of the equation, the Fed moderated its optimism. The Fed replaced "somewhat firmer economic growth" and "stabilization" in the housing market with: "Recent indicators have been mixed and the adjustment in the housing sector is ongoing."

The central bank also tempered the inflation paragraph, which reads: "Recent readings on core inflation have been somewhat elevated." That's opposed to January's statement, which read: "Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time."

The key changes came at the end of the statement. The Fed changed its boilerplate language, dropping the notion of further rate hikes. The new language reads: "Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information." (Italics added.)

The old language 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." (Italics added.)