Updated from 5:11 p.m. ESTWall Street maybe got a bit too much clarity from new Federal Reserve Chairman Ben Bernanke, who celebrated his first rate-setting meeting at the central bank Tuesday by delivering the Fed's 15th quarter-point rate hike in a row. In the
But both the overly and the moderately optimistic were disappointed. After the Fed announcement, the market priced in 88% odds that the Fed would hike to 5% in May. The market also priced in 20% odds of a move to 5.25% by June, compared with 0% on Monday, according to Miller Tabak. Concerns that a slowdown in the housing market -- as seen in a plunge in February new-home sales last week -- might hurt the economy in the second half of the year had fueled hope for the "one-and-done" crowd. But it didn't help their case that homebuilder Lennar ( LEN) posted a better-than-expected 35% increase in first quarter earnings on Tuesday. Lennar shares rose 1.2%, though the Philadelphia Housing Sector index dropped 0.7% following the Fed decision and statement. There was no mention of a slowing housing market in the Fed's statement. The direct references to the pace of economic growth were clear but fairly balanced. In the first quarter, the economy has "rebounded strongly" from "temporary" weakness in the fourth quarter of last year, the FOMC declared. But growth is expected to "moderate" in future quarters, the statement said. The Fed did stop referring to economic growth as "solid," instead predicting that growth will "moderate to a more sustainable pace." But economists still viewed the Fed's focus as remaining clearly on inflation. "My view is that although the housing market has slowed in response to higher interest rates ...
Fed officials are still concerned about inflation pressures emanating from a fully employed economy and from potential commodity-price increases," writes Sherry Cooper, chief economist at BMO Nesbitt Burns. Meanwhile, the one big difference in style with statements under former Fed Chairman Alan Greenspan was indeed more transparency. Bernanke followed through on his promise to explain what the Fed was thinking.
"One thing is clearer: They are worried about all these inflationary factors," says Marc Pado, market strategist at Cantor Fitzgerald. "They are worried about wages and unemployment, and not just energy but also commodity prices." This, Pado notes, is a big difference from the Greenspan days. In previous tightening cycles -- before the current one started in June 2004 -- the former Fed chairman would signal a looming rate hike, or rate cut, by emphasizing one particularly worrying factor. To signal no moves, he would focus on something nobody was worried about, Pado says. By including in the statement all of the potential sources of inflation the Fed is monitoring, Bernanke signaled that more rate hikes are on the way. But by not focusing on any particular issue, he has left as much ambiguity about future policy as Greenspan used to. The stock market had first worried, before being reassured, about Bernanke's ability and willingness to provide continuity with Greenspan. But continuity of uncertainty is not was the market was hoping for.