Alan Greenspan raised the stakes. The markets called his bet.

In a widely anticipated policy action, the Federal Reserve raised the overnight federal funds rate by 50 basis points to 6.5 percent last week and said the risks going forward were tilted toward higher inflation.

What did the markets do? They said, "Show me."

Show me the economic slowdown you're engineering, Mr. Chairman. Show me the effect of those interest-rate increases of yours on corporate profits. Show me the impact of slower economic and earnings growth on share prices.

Markets are usually fast on their feet. They gaze into the crystal ball, and the future appears before them. They race toward it.

Not this time. Stocks are demanding to see the effects of Greenspan's interest-rate medicine. Outlining a dosage schedule is not enough.

Stocks were positively jovial in advance of last week's meeting, rallying for the four consecutive days before it happened. Bonds, too, were having a good time of it, building on the stock rally.

Short- and intermediate-term notes were undeterred as well, although fed funds futures incorporated additional rate increases into their rate structure. At an implied yield of 6.775 percent, the July contract has fully priced in an additional 25 basis point move at the June 28 meeting.

Wild card

Other than that, the first 50-basis-point increase in more than five years was a non-event for the markets. A mere distraction; an inconvenience; something on the calendar, along with an annual dental checkup and a visit to Aunt Ethel in the nursing home, that is most notable for its passage.

The Fed's statement following the meeting was the standard four-paragraph boilerplate release, starting with the action taken and ending with the list of district banks that requested an increase in the discount rate by 50 basis points to 6 percent. The third paragraph, which encapsulates policy-makers' assessment of the risks going forward, was exactly the same as the in the March 21 statement.

That leaves paragraph two. While in March the committee was concerned that "increases in demand will continue to exceed the growth in potential supply," fostering inflationary imbalances, by May the process was a bit more advanced.

"Increases in demand have remained in excess of even the rapid pace of productivity-driven gains in potential supply, exerting continued pressure on resources," the Fed said. "The Committee is concerned that this disparity in the growth of demand and potential supply will continue, which could foster inflationary imbalances that would undermine the economy's outstanding performance."

Signal of things to come

It doesn't sound as if the Fed expects to take the summer off. Then again, having raised rates by 175 basis points in less than a year and accounting for the lags with which monetary policy operates, at some point the Fed will want to pause to assess the results.

"It doesn't look like an environment where rapid-fire increases in the funds rate will be forthcoming," says Paul DeRosa, a partner at Mt. Lucas Management Co. "The dollar is appreciating, the yield curve is flattening and commodity prices in general have been well behaved."

The fact that policy-makers raised the funds rate by 50 basis points last week in no way locks them into a similar move in June or beyond.

"The Fed can do anything it wants to do," DeRosa says. "It's their ball."

With the stock market dissing the Fed, the idea of any kind of negative wealth effect goes out the window. The Standard & Poor's 500 Index is virtually unchanged year to date. The Wilshire 5000 Index, which includes all U.S.-headquartered companies, is down 1.5 percent this year. And the Nasdaq Composite Index, while off 26 percent from its March 10 high, is down 8.6 percent since the start of the year.

"The stock market reacts as if interest rates have nothing to do with them," says Jim Glassman, senior economist at Chase Securities. "If people think the economy is not going to slow, that interest rates don't matter for the stock market, then there's a serious misunderstanding. The Fed always gets what it wants."

The stock market still acts as if Greenspan's bluffing.

Caroline Baum is a columnist for Bloomberg News.

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