What a difference a word makes. In the December FOMC statement, the Federal Reserve added the word "substantial" to characterize the downturn in the U.S. housing market. Investors took the change to mean the central bank was slightly more dovish. The hope was that the Fed might loosen its grip on its tightening bias, if not signal it is contemplating future rate cuts.

But such hopes were dashed Wednesday when the minutes of that same December FOMC meeting came out at 2 p.m. EST.

"The market is disappointed we're not seeing a Fed that becomes less hawkish and opens the door to rate cuts," says Art Hogan, chief markets analyst at Jefferies & Co. "There wasn't enough of a shift to neutral."

The stock market, which already was giving back a bit of its substantial morning rally, reversed completely in the wake of the minutes; major averages fell sharply in the afternoon before bouncing in the final hour to close mixed and not far from break-even. Still, the most interesting and telling portions of the FOMC minutes were largely overlooked and suggest the Fed is unlikely to signal any moves anytime soon.

After hitting a record intraday high of 12,580.35 in the morning and then falling to as low as 12,404 midafternoon, the Dow Jones Industrial Average finished Wednesday up 0.09% to close at 12,474.04. The Nasdaq Composite closed the day up 0.33% at 2423.16, while the S&P 500 slipped 0.11% to close at 1416.70. The Comp and S&P sustained similar intraday volatility.

The markets had initially rallied on news that the Institute for Supply Management's manufacturing index crossed back into growth territory with a higher-than-expected 51.4 reading for December. The index had fallen to 49.5 in November, its first contraction since 2003, which unnerved the markets.

When stocks pared their gains, the sectors that suffered the most were economically sensitive energy and materials stocks, and interest-rate-sensitive homebuilders.

Energy stocks tumbled as the price of oil plunged 4% to $58.61 per barrel and land driller Nabors Industries ( NBR) sharply cut its fourth-quarter forecasts.

Nabors dropped 5.8%; Exxon Mobil ( XOM), Halliburton ( HAL), Chesapeake Energy ( CHK), Weatherford International ( WFT) and ConocoPhillips ( COP) were among the other energy names hit hard. The Oil Services HOLDRs ( OIH) exchange-traded fund fell 4.5%, while the Energy Select Sector SPDRs ( XLE) fell 3.5%.

Shares of metals miners also were hit as copper fell more than 7% on the day, while gold dropped $8.20 on the day, after swinging by almost $20 intraday. Shares of Freeport McMoRan ( FCX) and Phelps Dodge ( PD) fell 9.4% and 3.12%, respectively.

The homebuilders were off throughout the day on news of earnings warnings from Lennar ( LEN). Lennar CEO Stuart Miller contradicted some competitors' recent declarations, saying that "we have not yet seen tangible evidence of a market recovery." Shares of Lennar fell 3.5%, while the Philadelphia Housing Sector Index fell 1.4%.

Elsewhere, home-improvement retailer Home Depot ( HD) gained 2.3% Wednesday on news that CEO Robert Nardelli left his post. Shares of mega-retailer Wal-Mart ( WMT) also jumped 3% on its stronger-than-expected report of December same-store sales.

Gems in the Minutes

News reports stated the stock market's FOMC-related woes were about slower-than-expected growth due to the Fed's comment that "developments in the housing market continued to weigh heavily on economic activity."

But given that half of the headlines said that inflation was the catalyst for concern and the other half said growth, there probably was not much reality in either analysis -- and the Fed added a housing-related caveat as well, noting that "there were some indications that home sales might be starting to stabilize."

In truth, the minutes were more of the same -- status quo -- as the FOMC retained its tightening bias.

The FOMC "remained concerned about the outlook for inflation," and "nearly all participants viewed core inflation as uncomfortably high and stressed the importance of moderation," according to the minutes. FOMC members said risks remain to the upside for inflation, and that remains "of greatest concern."

On the growth side, the message was balanced. "Several members judged that the subdued tone of some incoming indicators meant that the downside risks to economic growth in the near term had increased a little and become a bit more broadly based than previously thought." The FOMC also said that recent indicators had been "mixed."

Buried on page three, meanwhile, was an overlooked gem of insight, says Joe Brusuelas, chief economist at IDEAglobal. The FOMC discusses "measurement issues" of automobile output, adding that these issues "likely caused an overstatement of the rate of increase in real GDP in the third quarter, and the gradual unwinding of those effects would probably lead to an understatement of real GDP growth over the next several quarters."

"If this is true, this is enormous," says Brusuelas. "This is the kind of stuff you see in the green book," the Fed's insider version of the so-called beige book report on economic activity, which is published between FOMC meetings.

Translation: To account for the overstated GDP in the third quarter (and most likely the fourth too, according to Brusuelas), headline GDP for the coming quarters will look lower than they really are.

If the Fed is worried about measurement, it'll be ever more vigilant in its data dependence, giving few clues about future meetings or policy decisions.

And "they'll be more hesitant to cut rates," says Brusuelas.

Unless, on the other hand, Friday's December nonfarm payrolls report confirms the ADP National Employment Report for December, which showed a decline of 40,000 jobs in the month. The consensus expects the Labor Department to report 115,000 new jobs for December.

One weak employment report doesn't make the case for a rate cut. But if the employment picture softens more, the markets might just get their desired cut. If inflation remains low and unemployment ticks up, it would be the Fed's triumphant "we kicked inflation and didn't kill the economy" rate cut to punctuate the soft landing.

Still, Wednesday's volatile session suggests the stock market isn't really ready to see bad news as good news yet. So if Friday's payrolls data are weak, don't expect a rally.

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 here to send her an email.

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