We all know the parable of the boy who cried wolf, but market players are contemplating a modern version called "The Economists Who Cried 'Rate Hike!'"
In the last few years we heard endless hawkish comments from various members of the Fed that yielded one minor rate hike in December 2015. Despite the endless speeches, television appearance and random comments about how conditions were improving and that a number of rate hikes would be forthcoming, predictions of rate hikes have just been dead wrong.
It is understandable that Fed members would tend to have a bias toward "normalizing" rates, as it is the only concrete way to declare that their years of dovishness have been effective. If the economy is still so weak that the Fed can't hike, then obviously the central bank has failed in its policy goals.
The problem for the Fed -- which is a positive for the bulls -- is that it is hard to believe anything it says. The pattern has been that members start making predictions of rate hikes followed by more lackluster economic news, and then they back off and say they remain "data dependent."
Even the hike that is being talked about for June depends on further economic improvement. The Fed seems convinced that the economy is better than what the market thinks, but the likelihood that the recent flurry of hawkishness will reverse is quite high.
The bears have made progress today, but they are still hesitant to press. They know the likelihood is that Fed will temper its hawkishness at some point and the indices will fly higher again, so it is better not to overstay their welcome on the dark side.