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Market Outlook: Easy Hand of Fed Guides Markets to Quarter End

The cooing of a just slightly more dovish Fed could resonate in markets again Wednesday, as traders put on quarter end trades and reconsider the potential for more Fed easing.

Chairman of the Federal Reserve Ben Bernanke speaks at the Federal Deposit Insurance Corporation headquarters, on February 16, 2012 in Arlington, Virgina.
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Chairman of the Federal Reserve Ben Bernanke speaks at the Federal Deposit Insurance Corporation headquarters, on February 16, 2012 in Arlington, Virgina.

Fed Chairman Ben Bernanke was on ABC News Tuesday evening, a day after his speech to a group of economists reversed the view of some traders that an improving economy makes it more likely the Fed would hold off on another round of quantitative easing .

Bernanke’s comments were not new Monday, but he emphasized Fed accommodation should continue in order to spur demand and help a weak job market. That led some to believe the Fed would stick to its forecast of zero rates until late 2014, and that it cracked the door slightly to a possible third round of quantitative easing, or asset purchases.

On ABC, he said the Fed does not take options off the table. “We don’t know what’s going to happen in the future, and we have to be prepared to respond to however the economy evolves,” he said.

Bernanke also said rising gasoline prices threaten growth, could create inflation and hurt consumer spending.

“His remarks today reinforce the case that further QE will only come about if the economy deteriorates. We continue to expect a reiteration of the late 2014 rate guidance at the April FOMC meeting but do not see any change in balance sheet policy then,” said J.P. Morgan economist Michael Feroli, in a note.

Fed watchers believe Bernanke’s easing bias has remained the same, and he will keep all options open as the economy heads into 2013, a year where federal budget cuts could hit the economy.

“We have potential fiscal tightening in 2013,” said RBS senior Treasury strategist John Briggs. “It could be as much as 3 points off of GDP...My opinion is he is more afraid of easing off from accommodation than he is of adding another log to the fire by a substantial degree.”

Fed speak will be back in force Thursday, when Bernanke lectures another class at George Washington University and several Fed presidents are speaking.

There are durable goods orders Wednesday at 830 a.m. ET, and a $35 billion 5-year note auction at 1 p.m. Earnings reports are expected from Family Dollar and Commercial Metals, before the bell, and Mosaic, Paychex and Red Hat after the close.

Stocks traded sluggishly Tuesday, after Monday’s sharp gains. The Dow fell 43 to 13,197, and the S&P 500 fell 3 to 1412. The dollar was slightly higher, up 0.3 percent against the euro and 0.4 percent against the yen. The 10-year yield fell to 2.189 percent.

“The durable goods will be of interest but I think people are still scrambling around trying to figure out the offset they’re seeing in housing,” said Art Cashin, director of floor operations at UBS. “They’ve become focused on two things. They’re focused on jobs and they’re focused on housing and is it rolling over.”

Traders were discussing conflicting earnings news this week first from lower end homebuilder KB Homes ,which had disappointing results and an 8 percent drop in new orders. Then a second report from Lennar kicked off a rally in homebuilders Tuesday, with its better earnings news.

Toll Brothers later Tuesday added to the positive trend. Toll CEO Douglas Yearly said on CNBC late Tuesday afternoon that it’s been the “best spring in five years” and new orders are up significantly. “I’m optimistic right now,” he said. Toll’s homes average $575,000.

The homebuilders’ reports follow a string of somewhat disappointing housing data last week. On Tuesday, S&P/Case-Shiller reported its home prices indexesreached new lows in Janury but the decline slowed from December.

Besides watching data, traders expect to see end of quarter portfolio adjustments this week.

“There’s talk the allocators might have to sell stocks and buy fixed income just to keep their percentages steady,” Briggs said.

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.