Stocks sailed south after a fresh gust of
-inspired inflation worries.
Investors like to see the Federal Reserve as either clearly hawkish or obviously dovish. But the minutes released Wednesday afternoon were neither, and worrisome for that reason.
The Fed said its conviction about its moderate growth forecast wobbled, as did its conviction that inflation will decline. Stocks extended their losses, while bonds sold off in acceptance and acknowledgement of the inflation threat.
Dow Jones Industrial Average
was down just over 60 points prior the FOMC minutes' release at 2 p.m. EDT but extended the drop afterward to finish down 89 points, or 0.7%, at 12,484.62. The
fell 0.7% on the day to close at 1438.87, and the
closed down 0.7% as well to close at 2459.31.
"The market was up eight days in a row, in a great rally," says Todd Leone, head of listed trading at Cowen & Co. "It's just a bit tired. The market took the minutes as a bit bearish, but really the Fed doesn't know. They'll look at the data and be diligent either way."
The Treasury bond market sold off modestly in the wake of the FOMC minutes. The two-year note fell 2/32 to yield 4.71, while the 10-year and the 30-year slipped 4/32 and 3/32 to yield 4.73% and 4.91%, respectively.
"This was another bout of re-evaluating the Fed's seriousness about inflation," says T.J. Marta, fixed-income strategist at RBC Capital Markets. "The Fed didn't really change, but the market did. The bond market selloff was a bit of 'Mom really means it this time' about inflation."
Investors were looking for clarity on what the newly injected flexibility might mean -- cut or hike? In the statement following the March meeting, the Fed removed the term "any additional firming" to describe potential policy decisions, replacing it with "future policy adjustments." Market participants quickly took the shift to mean the Fed was dovish and leaning toward a much-awaited and much-desired rate cut.
Subsequent comments from Fed officials caused the markets to question that interpretation. Instead of pointing in one direction or another, the minutes reveal only a greater depth of uncertainty about the path of growth and inflation.
The Fed acknowledged that risks have increased to its forecast for moderate growth: "Additional evidence of sluggish business investment and recent developments in the subprime mortgage market suggested that the downside risks relative to the expectation of moderate growth had increased in the weeks since the January FOMC meeting."
On inflation, the Fed says: "Most participants continued to expect that core inflation would slow gradually, but the recent readings on inflation and productivity growth, along with higher energy prices, had increased the odds that inflation would fail to moderate as expected; that risk remained the Committee's predominant concern."
Investors say they just want clarity.
"The Fed really wants investors to take them on face value"-- meaning "data-dependent," says Joe Brusuelas, chief economist at IDEAglobal. "We have a Fed seeing a relatively solid pace of consumption worried about housing and autos and hedging its bets against a business outlook that is a little shaky at this point."
The Fed noted the tight labor market and persistent gains in personal income as supportive of consumer spending. It also lamented weaker-than-expected business spending, but says that "financing conditions and other fundamentals remained favorable for a pickup in capital spending."
Capping the Fed's increasingly ambivalent tone, the minutes end with a sentence that any editor would question: "The Committee agreed that further policy firming might prove necessary to foster lower inflation, but in light of the increased uncertainty about the outlook for both growth and inflation, the Committee also agreed that the statement should no longer cite only the possibility of further firming."
The rhetoric adds up to a Fed that does nothing, which most economists consider prudent and investors have gotten used to.
"The FOMC is feeling an increased intensity and unpredictability of crosswinds in the outlook, and the tightrope of steady rates that the Fed has been traversing since early August 2006 got narrower," writes Brian Bethune, U.S. economist at Global Insight. "During this turbulent phase of the business cycle, it seems prudent for the FOMC to keep the interest rate adjustment balance bar even."
The market's focus was not entirely on the Fed Wednesday, even with extra doses of rhetoric from Bernanke and Richmond Federal Reserve President Jeffrey Lacker. Lacker was typically hawkish, while Bernanke kept his remarks on the topic of regulating hedge funds.
Earnings season is finally underway. The reports kicked off Tuesday night when
posted strong profits. Alcoa ended the day up 0.5%.
But Wednesday brings the first disappointment. BlackBerry maker
Research In Motion
reported disappointing results after the bell, sending the stock down 6.26% in postclose trading after already slipping 1.5% during the session.
reported a strong, 68% year-over-year jump in earnings, sending it up 0.4% in recent after-hours trading.
announcement that the bank will cut 17,000 jobs didn't inspire investors either. Shares fell 1.2% on the day.
In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click
to send her an email.