SAN FRANCISCO -- It's a classic "he said, she said" situation.

He, in this case the

Federal Reserve

, issued a 50 basis-point rate hike and said the risks going forward are weighted toward "heightened inflation pressures." In addition, the central bank also made the following


Increases in demand have remained in excess of even the rapid pace of productivity-driven gains in potential supply, exerting continued pressure on resources. The Committee is concerned that this disparity in the growth of demand and potential supply will continue, which could foster inflationary imbalances that would undermine the economy's outstanding performance.

She, in this case the U.S. equity markets, said -- in so many words -- "Are you talking to me? (are you talking to



Wall Street's concern about the Fed lasted all of about 30 minutes on Tuesday -- roughly from 2:15 p.m. EDT to 2:45 p.m. -- when major averages tumbled from morning highs. Once as high as 10,963.36, the

Dow Jones Industrial Average

fell to as low as 10,833.82. Similarly, the

Nasdaq Composite Index

lost about 100 points from its pre-hike announcement best of 3729.12, while the

S&P 500

dipped to 1450.76 vs. its intraday high of 1469.89.

Yet the averages rallied soon thereafter. The Dow ended up 1.2% to 10,934.57; the Comp higher by 3.1% to 3717.57; and the S&P 500 up 0.9% to 1466.04.

The upturn was marred only by another day of lackluster volume. Only 951.6 million shares traded on the

New York Stock Exchange

and 1.5 billion in over-the-counter action; again, that's below average daily volume this year.

Volume doldrums notwithstanding, it was as if the stock market presumed the Fed will not raise rates at its two-day June meeting. Or that it will raise interest rates by a modest 25 basis points in June and then end the tightening cycle, as Bruce Steinberg, chief economist at

Merrill Lynch


The market's ability to look beyond the Fed's words and actions stemmed mainly from this morning's benign

Consumer Price Index

report. Coming on the heels of similarly friendly

retail sales and

producer price index data, the CPI report had Wall Street feeling optimistic about the Fed's forward path (vs. pass).

Yet the statement accompanying Tuesday's rate hike "strongly suggests that the Fed's work is not done," according to Ken Mayland, president of

ClearView Economics

in Pepper Pike, Ohio. "The only question is whether the Fed raises interest rates one-quarter or one-half percent on June 28."

You'll get a chance to register your thoughts on that subject in a moment. But first, a note about the


economic news out Tuesday, specifically the

Commerce Department's

report that new

housing starts rose 2.8% in April to an annual rate of 1.66 million.

"Looking past today's Fed policy tightening action, we cannot contemplate an end to this episode of rising rates until the housing sector rolls over," Mayland said. "That obviously has not yet occurred."

Obviously, Wall Street was not concerned.

The dichotomy between what the Fed is saying and what the market is doing will probably resolve itself like the average domestic squabble: with a lot of unpleasantness.

Tuesday's market rise was "some kind of obscenity toward the Fed," said Mitchell Held, economist at

Salomon Smith Barney

, which has been among the most hawkish firms regarding the Fed. Salomon still foresees a fed funds rate of 7.50% by year-end vs. 6.50% after Tuesday's hike.

"The Fed is not through, clearly," Held said, noting aggregate demand hasn't slowed and corporations are "experimenting with passing through price increases." Neither portends a less aggressive Fed, he said.

Dan Laufenberg, chief U.S. economist at

American Express Financial

in Minneapolis, has a less draconian view of the inflation risks, believing fed funds will peak at 7%.

But he's concerned about the dollar's ability to maintain its recent strength. If it weakens before the economy begins to slow "the inflationary risks intensify considerably" because of higher import prices, which will encourage domestic producers to ratchet up their prices as well, he said.

The economists agreed those factors, more than backward-looking inflation data, will determine the course of future Fed action. That, and whether the stock market continues to ignore the Fed.

The good news -- and the danger for those long -- is the market has the prerogative to change its mind.

Bonus Round

Since the overwhelming majority of respondents to last night's

poll called the Fed exactly right, here's another chance to play



See Results

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at .