Newly released minutes of the central bank's April meeting show the Open Market Committee acting like the economist with a million arms: On the one hand, first-quarter economic data were poor, but on the other there are reasons to think it won't last.
On net, the Fed appears to be more bullish, with the minutes at least twice citing the long-awaited movement in personal income and some measures of wages as a key reason for not sweating the near-recessionary pace of first-quarter growth.
The only specific mention of the timing of a rate hike was a mention that "a few" members wanted to raise rates beginning in June despite the weak first half of the year. But that the majority squelched the idea in favor of a meeting-by-meeting approach that will let policy makers weigh new data each time the committee meets through year-end. The committee also rejected suggestions from unnamed members that the Fed give a more explicit signal that the first hike in the Fed Funds rate since 2006 would be coming soon.
"The message is that while they think it's only temporary, they want to be shown it's only temporary" before raising rates, said Joel Naroff, president of Naroff Economic Advisors. "By September there will be four jobs reports and we will clearly know if it's temporary.''
The Fed reported that its staff had cut its view of first-half 2015 growth -- which normally would be a sign that rate hikes might be delayed -- but offset this by noting that the staff actually boosted the bank's internal forecasts for all of 2015 and next year.
"Much of this weakness was attributed to transitory factors or statistical noise, with little implication for the pace of expansion beyond the near term," according to the minutes. "Indeed, the medium-term projection for real GDP growth was revised up modestly, as monetary policy was assumed to be a little more accommodative in this projection and the projected path for the foreign exchange value of the dollar was a little lower."
Specifically, the staff dismissed the idea that risk to the recovery was moving to any unusual or dangerous level, the minutes said.
"The staff viewed the uncertainty around its April projections for real [gross domestic product] growth, the unemployment rate, and inflation as similar to the average of the past 20 years," the minutes said.
Stocks briefly went up and interest rates on 10-year Treasury securities down after the minutes were released at 2 p.m. Eastern time. But each soon reversed, suggesting the minutes didn't radically alter perceptions of what the Fed will do next.
One exception was rate-sensitive housing stocks like builders PulteGroup (PHM) and D.R. Horton (DHI). They went up and stayed up, with investors concluding for now that the good recent news on housing starts and incomes, coupled with a few more months of low interest rates, brightens construction prospects. Oil stocks like Exxon Mobil (XOM) and energy-services plays like Halliburton (HAL) were mostly higher, but none of the top stocks moved as much as 1% in either direction.
U.S. gross domestic production grew at a 0.2% annual rate in the January-March quarter, according to the Commerce Department's initial estimate. The figure is widely expected to be revised down to show the economy contracted, based on data reported since the initial estimate of GDP last month.
The market will get its next view of the Fed's thinking on Friday, when Fed Chair Janet Yellen gives a speech to the Greater Providence Chamber of Commerce in Rhode Island.