Stocks react to the Fed's game of 'Good cop, bad cop'

So far, Yellen and Fischer are playing "good cop, bad cop" very well.

In a speech on the Fed 's "toolkit," Yellen devoted only three brief paragraphs to the current economic outlook. The key sentence is here: "Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months."

But Janet Yellen cannot help but be, well, Janet Yellen. She immediately hedged this comment with other, dilutive statements:

"Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook."

"...the range of reasonably likely outcomes for the federal funds rate is quite wide..."

"...the economic outlook is uncertain, and so monetary policy is not on a preset course."

What's this all mean? Yellen clearly implied that every meeting is still live, but she did not tip her hat enough to indicate that September is any more likely than before her speech.

I said earlier this morning that the biggest risk to the markets was to the downside, not to the upside, because with stocks at historic highs if Yellen clearly implied a September rate hike was coming stocks had room to move down.

But if Yellen did exactly what she did do — talk about an improving economy without clearly implying a September hike was coming — there would be only modest upside for stocks, given the fairly full valuation.

That is exactly how the market is reacting. The S&P 500 , after a brief move down on the initial headline, is up only five points from where it was trading pre-Yellen.

Banks, which also moved up on the initial headline, are now flat on the day, implying investors do not believe a rate hike is imminent. Utilities, which would move down if there was a clear concern on higher rates, are fractionally higher.

And volatility? The CBOE Volatility Index , slightly elevated in the last two days, is back below 13. Even longer-dated VIX futures are down slightly.

Then, it was Fischer's turn. The S&P started dropping as soon as he said, "Yes to both questions" in response to a question from my colleague Steve Liesman on whether September was live and whether there could be more than one rate hike this year.

By midday, the S&P was 15 points below where it was before Fischer's interview.

See? S&P goes up 6 points on Yellen's bland comments, but goes down 15 points on Fischer's more definitive comments.

The risk is to the downside.