Fed Hikes, Market Pitches Mysterious Fit

As was assumed by every living sentient being, the Federal Reserve announced its 15th consecutive 1/4 point hike in the Fed Funds rate today, raising it to 4.75%, a level not seen in almost 5 years.

These results of the first policy meeting under Ben Bernanke's stewardship were accompanied by a statement which repeated incumbent Fed language regarding the prospect of additional hikes, namely:

The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.

The equity markets proceeded to freak right out, spoiling a modest rally inspired by a strong energy sector and rip-roaring consumer confidence.  There's often a bit of a whipsaw effect after these announcements, but with more than a half hour of trading gone by, the indices are off most of a percent from where they were pre-announcement.  Is it a huge move?  No.  But I don't see cause for any downward move.

Economists and market watchers had predicted this hike as a gimme and consensus was that there would be yet one additional, and possibly a third.  On the other hand, I've long held that there was a good chance today's hike would be the last one before the Fed paused.  That's a stance I'm perfectly happy sticking with in light of today's statement, which doesn't suggest to me that another boost has been identified as already planned or even "likely", which is how Greenspan used to telegraph presumptive future hikes.

Rather, the "may be needed" language seems to indicate a data-driven path of future decisions, meaning that absent inflationary concerns, the committee ought to be free to pause as soon as it feels it's arrived at a neutral rate.  They may or may not agree that rate is achieved with the Fed Funds at 4.75%, but I certainly don't see any suggestion that the Bernanke Fed believes the neutral rate to be higher, much less more than 1 or 2 ticks higher, which is the policy that was already baked into today's market prices before the statement was released.

For what it's worth, I continue to see between 0 and 1 hikes remaining before the Fed pauses, assuming inflation signals stand pat.  What I can't fathom is why the market seems to be inferring from the Fed's statement not only the 1 or 2 it had already assumed, but an increasing likelihood of at least 2, if not more.

If I'm right, time will bear it out and the markets will recover their unnecessary discount (which seems to widen with every hike or utterance, despite rock steady signals from the Fed) when they do finally pause.

In the meantime, it appears that anything Gentle Ben does will continue to be taken as a bearish signal for the markets.