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Alan Greenspan

! Bock bock!

A rate hike might not be as delicious as a Cadbury egg, but it certainly was what the market wanted today. As expected, the

Federal Reserve

hiked the fed funds target by 25 basis points to 5.25%, and the bond market found a measure of relief. The Fed appeared to signal in a statement that it may not need to raise interest rates again before the end of the year, also a comfort for bonds.

Lately the 30-year Treasury bond was up 24/32 to trade at 102 22/32. The yield fell 6 basis points to 5.93%, the lowest closing yield since July 21. For most of the day, the market hovered around break-even before rallying after the Fed's

statement, released at 2:15 p.m. EDT.

What pleased the market was the Fed's accompanying statement, which said: "Today's increase in the federal funds rate, together with the policy action in June and the firming of conditions more generally in U.S. financial markets over recent months, should markedly diminish the risk of rising inflation going forward."

"The market seems to be losing the fear that the Fed is going to be very aggressive in tightening rates," said

Barclays Capital

senior economist Henry Willmore. "That trend basically started with the PPI

Producer Price Index

two weeks ago and gained momentum with the CPI

Consumer Price Index

last week."

The bond market will probably go back on Fed watch in about 24 hours, but according to Bill Kirby, co-head of government trading at

Prudential Securities

, there's less worry in the market now that the Fed's going to boost interest rates another time before the end of the year and the market starts to fully feel the effect of Y2K. The Fed's monetary policy committee meets three more times before the end of the year: Oct. 5, Nov. 16 and Dec. 21. Virtually nobody believes the Fed would tighten rates in December even if warranted because that's a potentially destabilizing period, and many in the market believe November is probably out of the question too.

"There's a chance they can go in October," said Kirby. "It's possibly the last time they could raise rates in a while." Of course, this all depends on the economic releases -- "conversely, we could see more strong data and bad inflation numbers and we could be right back to 6.25%." Which could draw the Fed's wrath again.

Joel Naroff, president of

Naroff Economic Advisors

, interpreted the Fed's statement more bearishly. He said the statement "the degree of monetary ease required to address the global financial market turmoil of last fall is no longer consistent with sustained, noninflationary, economic expansion" indicates caution on the part of the Fed.

"The monetary authorities want it known that they stand prepared to take additional action if the economy does not show signs of slowing and inflationary pressures do not abate," he said in a comment.

The next red-letter day for the markets is probably next Friday, Sept. 3, when the August

employment report

is released. Wage pressures are a chief concern for the Fed, judging by speeches from officials and Greenspan's


testimony, so a repeat of the 0.5% increase in average hourly earnings would make the market nervous again.

In addition to hiking the fed funds rate, the Fed also raised the discount rate to 4.75% from 4.5%, which is the rate banks pay to borrow money from the Fed's discount window. This rate is largely symbolic, but raising that rate is generally regarded as a sign of aggressiveness.

The Fed also announced that it had maintained a neutral directive, which signals no predilection toward raising or lowering rates in the weeks leading to the next meeting. The Fed surprised the market in June by reverting to neutral, but the surprise was a combination of the Fed's new disclosure policy (they previously didn't announce whether they had changed their bias) and the market forgetting history (the Fed almost always returns to neutral following a rate increase).

This is the Fed's second rate hike of this year. It hiked the funds rate to 5% on June 30. In 1998, it lowered the funds rate three times to a final 4.75% from 5.5%.