Market Hears Only Fed Doves

Seeing the glass half full as the summer comes to a close, traders made a dovish interpretation of the minutes of the Aug. 8 FOMC meeting Tuesday.

The committee members warned that inflation is still a serious threat and said the decision to pause was a "close call." But market participants seemed to focus more on the central bank's comments about the slowing economy dampening inflation and the lagging effect of prior rate hikes.

After dipping in initial reaction to the 2 p.m. EDT release of the minutes and the preopen report on consumer confidence, major averages rebounded to close modestly higher on the notion that the minutes point to a stop in the Fed's tightening cycle rather than just a pause. Also, traders had set themselves up for more disagreement in the minutes, given that Richmond Fed President Jeffrey Lacker issued a formal dissent at the meeting.

"The key in the minutes is that the Fed decided to pause because they were worried about the economy slowing too much," says Marc Pado, chief investment strategist at Cantor Fitzgerald, adding that higher inflation doesn't scare stock investors as long as the Fed doesn't react harshly to it. "If they had focused on price stability and hammered that home regardless of what was going on in the economy, the markets would not have rallied."

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