Wall Street's Optimism Subsides

Federal Reserve Chairman Ben S. Bernanke delivered the interest rate increase everyone was waiting for today.

Unfortunately it came wrapped in a warning that Wall Street wasn't ready for.

"Further policy firming may be needed," the Fed said because, "economic growth has rebounded strongly."

That handful of words was enough to knock 96 points off the Dow Jones industrial average, which fell to 11,154.54.

The Standard & Poor's 500 stock index dropped 8 points to 1,293.23. The Nasdaq Stock Market composite index plunged 11 points to 2,304.46.

The Wall Street reaction told more about the thinking of stock traders than the message from the Federal Reserve, which wasn't all that different from what Alan Greenspan used to say.

But Wall Street has been deluding itself into thinking the long, steady rise in interest rates surely must be coming to an end. There was nothing in today's message from the Fed to support that hope.

The bond market reacted more realistically, pushing up rates to reflect the Fed's action, which technically applies only to interest charged on overnight loans to banks.

That rate, one of two set directly by the Federal Reserve, was raised to 4.75 percent. That's the highest it's been in five years. But looking over a longer period of time, it's pretty much where rates usually are compared to inflation, a study released today pointed out.

Rates on 10-year government bonds rose by .07 percent to 4.78 percent in response to the Fed's action. And banks quickly added a quarter point to their prime rate, which serves as a benchmark for many credit lines, home equity loans and floating rate credit cards.

The rates that banks pay on certificates of deposit and money market accounts will also go up as a result of the Fed's decision today.