A weary market couldn't seem to find relief Tuesday, even after a positive first batch of earnings and indications that the Federal Reserve was not as hawkish as feared, at least not when it delivered its most recent rate hike.

According to the minutes of the Sept. 20 Fed meeting, Fed officials even considered pausing rate hikes after the economic disruptions caused by Hurricane Katrina.

But "a pause in policy tightening at this meeting had the potential to mislead the public both about the committee's perceptions of the fundamental strength and resilience of the economy and about its commitment to fostering price stability," Fed members thought.

On Wall Street, where fears of inflation and of a more hawkish Fed have led to sharp drops in stock prices last week, investors breathed a short-lived sigh of relief. The Dow Jones Industrial Average jumped to an intraday high of 10,312 after the minutes were released before giving back most of the gains by the close.

The blue-chip average finished at 10,253.17, on a modest gain of 14.41 points, or 0.14%. The Dow remained supported by the likes of Alcoa ( AA), which posted better-than-expected earnings after the close on Monday, and IBM ( IBM), which was upgraded by CSFB.

The S&P 500 lost 2.46 points, or 0.21%, at 1184.87. The losses were cushioned by energy shares that, after being battered last week, advanced as the price of crude oil rose $1.75 to $63.55 on Nymex. The Amex Oil Index rose 2%, lifted by the likes of Sunoco ( SUN), Amerada Hess ( AHC) and Chevron ( CVX).

The Nasdaq Composite fell 17.83 points, or 0.9%, to 2061.09, closing below its 200-day moving average (at 2076) for the first time since mid-May. The losses came even as bulls were anticipating strong earnings from tech darlings Apple ( AAPL) and Advanced Micro Devices ( AMD) after the close. The bulls only got half of what they wanted and, from a sentiment standpoint, it's likely the "wrong" company exceeded expectations.

Apple posted fourth-quarter sales that were below estimates and its shares were recently down 10.6% in after-hours trading. Meanwhile, AMD's results flew by expectations and its stock was recently up 1.3% in post-close trading.

While Apple's disappointment could dictate trading Wednesday, it's also notable that market breadth was decidedly negative Tuesday even as the S&P and Nasdaq suffered relatively modest declines. Decliners led advancers 5 to 4 in Big Board trading, where a solid 2.3 billion shares changed hands. Losers outpaced gainers by 21 to 8 in Nasdaq trading, where 1.9 billion shares traded and over 75% of the volume was to the downside.

Parsing the Minutes

Market sentiment might also vary on how much importance is granted to the Fed's minutes. On the one hand, the minutes revealed that the Fed may not have been as hawkish as recently feared.

There was some talk about changing the language of future statements, but that could even be construed to imply that the Fed may be closer to the end of the road. "Some sentiment was expressed to consider changes to forward-looking aspects of the statement at upcoming meetings, in part because of the considerable reduction in monetary policy accommodation that had already been accomplished," the minutes read.

"On balance, this is a report that does not suggest that the Fed is about to tighten more aggressively," says John Lonski, senior economist at Moody's. "And it's also mildly upbeat on about economic prospects."

Neither of these signals were pleasing for the bond market, which remains concerned that Fed policy may fall behind the curve on inflation, which erodes the value of fixed-assets such as bonds. The benchmark 10-year Treasury bond fell 7/32 while its yield rose to 4.39%.

But given recent economic data pointing to rising inflationary pressures and the much-more hawkish tone of Fed officials, most notably last week, there could be legitimate questions about the Fed's thinking.

"The minutes are now a little bit dated," says Lonski. "Depending on what we see in the Consumer Price Index Friday, this piece of paper could be worthless."
In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback; click here to send him an email.

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