Stock market participants have waited for weeks to find out what the Federal Reserve would say about its monetary policy, and many analysts believed that what the Fed said could determine whether January’s strong advances for the Nasdaq Composite (^IXIC) and other major market benchmarks meant the beginning of a new bull market. The Fed’s stocks were largely what people expected, and that sent the Nasdaq higher by 2% even as the S&P 500 (^GSPC 1.04%) and Dow Jones Industrial Average (^DJI 0.02%) were a bit less upbeat in their reaction. Index Daily Percentage Change Daily Point Change Dow +0.02% +7 S&P 500 +1.05% +43 Nasdaq +2.00% +232 Data source: Yahoo! Finance. The Fed’s decision itself wasn’t all that noteworthy, but investors reacted to Fed Chair Jerome Powell’s comments in his news conference following the release of the decision. Yet even though stocks moved higher, it’s apparent that many investors are only listening to what they want to hear and are ignoring the more troublesome aspects of what the central bank is looking at in the economy. A smaller rate increase The Fed boosted its federal funds rate by a quarter percentage point on Wednesday. That created a new target range of 4.55% to 4.75% for the short-term interest rate, and it was smaller than the half-percent boost the central bank made at its last monetary policy meeting. Much of the language stayed similar to what investors have seen in previous decisions. The Fed still believes that further increases in the federal funds rate will be appropriate in order to bring inflation back to the long-term target of 2%. At the same time, the Fed promised to keep looking at new data to assess the impact of its tighter monetary policy on the broader economy, acknowledging that there can be an extensive lag between when interest rates get raised and when other data confirms the impact of Fed tightening. Image source: Getty Images. The Fed also said it would keep reducing the size of its balance sheet at a rate consistent with its previously announced framework. Although it left open the possibility of adjusting its monetary policy stance as needed if new risks emerge, the Fed was adamant in its resolve to get inflation back down to 2%. Why the market celebrated There were several comments that Powell made in the press conference that stoked investor enthusiasm. The one most cited by market participants was the Fed’s recognition that the disinflationary process has begun, with rises in prices of goods moderating substantially. Investors took that comment as showing a clear end to high interest rates in the near future. Unfortunately, that’s an aggressive take on Powell’s actual comments and ignores their broader context. The Fed chair went on to say that for more than half of the components that go into total inflation, the central bank doesn’t see any signs of disinflation. Some of the forces that have brought goods prices down could be transitory, potentially taking away a supporting trend in the near future. And perhaps most importantly, tight labor markets could feed inflationary pressures longer than most people hope at this point. What to watch for Bond market investors and the Fed currently disagree on the future path of interest rates. Although Fed officials have suggested that the federal funds rate could rise above 5%, fed funds futures seem convinced that rates will stay steady or even fall by the end of the year. It’s always possible that economic conditions will worsen and force the Fed to reconsider its aggressive stance. However, what’s more likely is that the Fed will do what it has said it will do: Take action to ensure inflation keeps falling. If that ends up stopping a nascent bull market from moving ahead, that’s a price the central bank will be willing to pay. Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.