NEW YORK (CNN/Money) - Alan Greenspan made himself very clear last night: He does not take the bond market's signal of a slowing economy at face value, and that means he is probably set to keep on hiking short-term rates.

In last night's speech, the Fed chairman said that low long-term rates are not necessarily a signal of weak economic times to come.

Historically, a flattening yield curve has been pretty good at signaling a slowing economy. (A flat yield curve is what you get when long-term rates, often considerably higher than short-term rates, are falling closer and closer to short-term rates.)

It's bad news because long-term rates tend to fall when investors see tame inflation pressures and a softer economy.

On Tuesday, Greenspan's reluctance to attribute low rates to a slowdown was one reason for a slight increase in stocks -- if the Fed chief isn't worried, why should the stock market be?

"A flattening yield curve typically is indicative of the bond market's view that the Fed as being less accommodative," explains Carlos Borromeo, Senior Corporate Bond Trader at Stephens, Inc., a regional dealer in Little Rock, Ark. "I think the Chairman disagrees with this, and he may have a point since the recent "flattening" began from nearly record steep levels and the current Fed seems to be committed to hiking rates at a measured pace."

"It is comforting to see that the Fed Chairman himself is as confused about this market as the rest of us," he added.

Mr. G. admits he isn't sure why long-term rates are so low. But by dismissing the weak-economy signal rates could be sending, he must be betting on a strong economy -- one so strong it's pushing up labor costs and is going to experience more inflation without more Fed rate hikes.

A big red flag for the Fed is the jump in unit labor costs, which rose 4.3 percent at an annual rate in the first quarter of the year, according to last week's productivity report. Compare that with 2003, when the economy was still struggling to get back on its feet and unit labor costs actually fell by 0.3 percent.

Last Friday's tepid gain of 78,000 new jobs in May was shrugged off by the bulls for two reasons. One, they think it will prove to be a one-month pause; two, they note decline in the unemployment rate, which is derived from a separate survey.

But Borromeo is one who thinks the jobs report is a sign things aren't "exactly stellar."

He notes that Fed's steady stream of short-term rate hikes directly increases the cost to companies of day-to-day operations -- especially critical for companies like General Motors, which just announced 25,000 job cuts.

Asks Borromeo: "If companies' cost of funding go higher, and they start to cut jobs and close plants, is that really good for the economy?"

But Greenspan isn't alone in his thinking. Many of his colleagues at the Fed seem to agree. And so do many Wall Street economists.

The risk is that the bond market is right and the Fed is wrong about the underlying strength of the economy and that the loss of momentum in manufacturing is a sign of an overall loss of economic energy. Right now it looks like it's a risk the Fed is willing to run.

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-- Kathleen Hays is economics correspondent for CNN and contributes to Lou Dobbs Tonight.