Growth of the U.S.economy was less than half that of the first quarter, according to the Commerce Department in its first estimate of second-quarter Gross Domestic Product.  GDP increased at a seasonally adjusted 2.5% annual rate April, compared to 5.6% in the first quarter and also well below economists’ estimates of 3.2%. 

“Economic moderation seems to be underway” which “should help to limit inflation pressures over time” said Fed Chairman Ben Bernanke in his prepared comments to the Senate Banking Committee on Wednesday.  He noted the importance of “forward-looking” and taking a “longer-term” view as rate increases take time to affect the economy.  It may be that Mr. Bernanke and his Fed may have raised rates as far as they are going to for the foreseeable future. 

The Federal Reserve raised their benchmark interest rate for the 17th consecutive time yesterday which was a surprise to no one.  But in a surprise to many, they suggested for the first time that a pause might be coming soon.  Their statement said “the extent and timing of any additional” rate increases “will depend on the evolution of the outlook for both inflation and economic growth.” Stock markets surged on the news.  The Dow Jones Industrial Average soared to close 217.24 points higher than when the statement was released, a gain of about 2% - its best day in more than three years. The NASDAQ Stock Market was up 3%, its biggest one-day rally since March 2004. Long-term bond yields edged down as prices rose.

The Federal Reserve has increased rates by a quarter of a percent 16 times including their May increase without a major market drop, but one would think that the likely quarter point increase at the end of this month will be the straw that breaks the veritable camel’s (err bull’s) back.  Since that May 10th meeting the Federal Open Market Committee has become a ‘federal open mouth committee, as termed by one of our favorite economists, Ed Yardeni.  The mixed signals have rattled markets of all stripes, from stocks, to bonds, to commodities.