The lineup of producer prices and a slew of Federal Reserve speakers could have made for riveting drama Wednesday. Unfortunately, the show was anticlimactic. The Fed didn't say much to move the markets, which suffered minor losses save for the tech-heavy Nasdaq Composite.

Thursday brings consumer price inflation data and a Capitol Hill appearance by Fed Chairman Ben Bernanke, but the ending may be only slightly more satisfying. Bernanke is unlikely to take the politicized bait in his testimony to the now Democratic-led Senate Budget Committee. Economists expect that core consumer prices rose 0.2% in December.

The stock market is focused on earnings season, and hawkish talk from the Fed holds little shock value anymore. Both stock and bond investors have made quick business of accepting that rate cuts are not on the table until later in 2007, if at all.

Rate cut odds abated further Wednesday, spurred by stronger-than-expected reports of industrial production and capacity utilization, a benign beige book, and a report of improved confidence among U.S. homebuilders. The fed funds futures market is now no longer priced for even one 25-basis-point rate cut in 2007, according to Miller Tabak. If a cut is to happen at all, the fed funds futures market puts it in September at the earliest.

"With this kind of guesswork, a set of strong economic news could result in a complete unwinding of rate cut expectations toward the possibility of an insurance hike," writes Randy Diamond, a trader at Miller Tabak.

Indeed, inflation and rate hikes are the greater risk for the markets, as the tide of global liquidity never faded. Eventually that liquidity and tight labor market conditions might lead to inflation, says Michael Darda, chief economist at MKM Partners.

The beige book, which came out Wednesday afternoon, summed up the day's data -- that economic activity expanded at a "modest pace," that labor market conditions are "tightening," and that "manufacturing continued to expand in most districts."

The Fed noted that "nearly all" districts reported more softening in the housing market, but that commercial real estate markets remain strong, a view supported by a buyout offer by Brookfield Asset Management ( BAM) for mall operator Mills ( MLS) as well as Vornado Realty's ( VNO) bid for Equity Office Properties ( EOP), which had previously agreed to a deal with Blackstone Group.

On inflation, the Fed noted that prices for energy and materials have "eased, and competition has kept prices for final goods in check."

The recent fall in the price of oil and commodities was part of why the markets largely ignored the higher-than-expected 0.9% increase in producer prices in the month of December. Core PPI rose 0.2% in the month, higher than the 0.1% jump analysts expected.

After dropping 15% thus far this year, the price of oil rebounded 2% Wednesday to $52.25. Stronger-than-expected reports of industrial production and capacity utilization in December once again show the economy reaccelerating. The National Association of Home Builders reported its index for sales of new single-family homes rose to its highest level since July.

On the heels of homebuilder Lennar's ( LEN) upbeat earnings forecast, it was housing confidence that kicked Treasury yields higher Wednesday. The price of the 10-year note fell 8/32, sending its yield up to 4.78%. The 30-year bond fell 13/32 to yield 4.88% and the two-year note fell 2/32 to yield 4.9%.

Lennar's shares climbed 4.5%, while competitors Centex ( CTX), D.R. Horton ( CHI), and Pulte Homes ( PHM) climbed over 2% each.

Overall, the stock market ended the day a fraction lower. The Dow Jones Industrial Average and the S&P 500 slipped less than 0.1% apiece to close at 12,577.15 and 1430.62, respectively. The Nasdaq fell 0.7% to close at 2479.42 amid disappointment over results and/or guidance from Intel ( INTC) and Rackable Systems ( RACK), which tumbled 38%.

Other tech names took a breather Wednesday after strong rallies, including IBM ( IBM), Micron Technologies ( MU) and Cisco ( CSCO).

Shares of Apple Computer ( AAPL) fell 2.21% in Wednesday's regular session, but its post-close earnings report was undeniably strong . Apple's shares were recently gaining 3.9% in after-hours trading.

JPMorgan Chase ( JPM) reported strong earnings before the bell Wednesday, but its shares climbed only 0.1% on the news.

Bernanke: Speak No Evil

Fed speakers didn't help traders on Wednesday. Typically dovish San Francisco Fed President Janet Yellen said a "gangbusters" labor market is the biggest threat to taming inflation. "I do take it as a serious risk," Yellen said on the subject of wage inflation, in a speech to the Arizona Council on Economic Education in Scottsdale, Ariz.

Federal Reserve Governor Frederic Mishkin also spoke Wednesday to the Forecasters Club of New York, and his words painted a hawkish hue on the Fed's take on housing. Mishkin said central banks should not use rate movements to prick asset-price bubbles. He said central banks should react quickly to asset bubble collapses to "ensure that sharp movements in the prices of homes or other assets do not have serious negative consequences on inflation and employment."

Given the Fed's hawkish tone in most public forums throughout the year-long housing market plunge, the central bank likely deems such a rescue rate cut unnecessary. (St. Louis Federal Reserve President William Poole is scheduled to speak later this evening in Brentwood, Mo.)

Don't expect much fireworks from Bernanke. The Fed chairman's style is to let the regional Fed presidents and governors speak freely about the economy and inflation while he takes a more stoic tone. In the face of a newly Democratic Senate committee that is skeptical of inflation targets and eager to show constituents its concern about entitlement programs, the chairman likely will take baby steps in making an argument for such targets and probably won't answer questions about reforming Medicare or Social Security.

Inflation targets are a key part of Bernanke's goals for the Fed, say most economists, but with Democrats in charge, he'll have to be cautious. Democrats generally dislike targets because they believe they put the central bank in a position to fight inflation even at the expense of healthy economic growth. Inflation targets can be narrow or rather wide, but would certainly require more "communication" from Bernanke.

"I think he'll try to thread the needle, focusing on growth rather than inflation" says Joe Brusuelas, adding that Bernanke will subtly try to educate the committee on the benefits of inflation targets. A heavy-handed approach would jeopardize his goals too much. "Bernanke is an intellectual forefather of inflation targeting," says Brusuelas. "This is who he is."

While the bond market tried to get its head around economic conditions, stock investors had their eyes on earnings Wednesday, and the tech rally took a breather. Thursday brings the triple whammy of Bernanke, CPI and another batch of earnings. Get your popcorn ready.
In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click here to send her an email.