In the statement after the FOMC meeting, the Fed upgraded - sllghtly - their view of the economy and said that long term inflation expectations remain stable:

Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

In addition, during his press conference, after a question about rising interest rates, Bernanke said:

Yes, rates have come up some. That's in part due to more optimism - I think - about the economy. It's in part due to perceptions of the Federal Reserve. The forecasts that our participants submitted for this meeting, of course, were done in the last few days, so they were done with full knowledge of what happened to financial conditions. Rates have tightened some, but other factors have been more positive - increasing house prices, for example.

And of course the response of stock traders was to sell. Bernanke essentially said that QE is working to raise growth while keeping inflation expectations in check and for some reason that was taken as a sell signal. Now, if I was Bernanke I'd be mighty careful about patting myself and the other members of the FOMC on the back for this economy but if you assume that he is correct - I know, I know - then why would you sell stocks? I understand why you would want to sell bonds if you believe that growth is improving but growth is exactly the reason to own stocks.

I suppose one interpretation might be that Bernanke is seeing green shoots where traders are seeing brown patches and they fear he'll shut off QE too soon. Indeed, I wondered all afternoon what economic statistics Bernanke and crew have been looking at because they can't be the same ones I'm seeing. If Bernanke is hanging is hat on higher real estate prices and that alone, I think his economic forecasting record will remain unblemished by success. But that begs the question, if QE hasn't worked yet is there some reason to believe it will at some point? Or are stock traders just buying stocks on the premise that the 10 year was going to stay under 2% permanently and therefore they could justify a really high multiple on present earnings, growth be damned? 

The best explanation may be contained in this short phrase: "...but fiscal policy is restraining economic growth". I don't know of anyone who thinks fiscal policy or regulatory policy is about to take a turn for the better. Quantitative easing is the only game in town and the obvious fear is that without it, we won't even have the growth we have now. As a QE skeptic, I'm more inclined to believe that with or without QE and assuming continued political gridlock, this is as good as its going to get. If we didn't have QE right now, my guess is that growth would be exactly where it is anyway. Stocks might be more reasonably priced of course but actual real economic growth? Everything I've seen says the wealth effect that Bernanke has been flogging as the great benefit of QE is ephemeral at best and almost non existent at worst. The wealth effect from real estate might be higher but that is based on research done when everyone thought real estate prices didn't go down. I can't help but think the effect is less now that that myth has been busted. There are some positive benefits from more people being above water on their mortgages - more labor mobility for one - but enough to change the trajectory of the economy? Doubtful.

This market has been overvalued for a while now and higher interest rates are negative unless you believe that growth will accelerate enough to offset the higher rates and produce better - much better - earnings growth. What the market seemed to be saying today is that all we're getting from QE is higher interest rates. If that is correct, the higher rates won't last either because inflation is conspicuous mostly for its absence. We'll see how this plays out over the coming weeks but if stocks are going to go higher, Bernanke better be right about better growth. Count me as skeptical.