For months, the Federal Reserve and financial markets seemed to be reading from a different script.
Growing increasingly confident in the health of the economy, the central bank was anticipating starting to raise short-term interest rates sometime this summer. In December, Fed policymakers estimated that rates would top 1 percent by the end of 2015, 2.5 percent by the end of 2016 and 3.6 percent by the end of 2017.
By contrast, the futures market didn't expect rate hikes to begin until the fourth quarter at the earliest. And even then investors believed rates would end the year at just 0.5 percent.
Now, the divergence is closing somewhat as the Fed shows, in the written notes of its January 27-28 meeting, that it is increasingly concerned about the impact of falling oil prices on the economy and the recent collapse of inflation expectations.
In the process, investors who wait with bated breath for the tiniest change in the Fed's language have just become more confused about where rates are headed. That's because the meeting minutes were spiked with a mix of asset bubble warnings and unclear language surrounding the Fed's intention to keep rates lower for longer.
No wonder stocks finished mixed on Wednesday amid choppy trading.
Paul Ashworth at Capital Economics noted as much as traders focused on the following passage from the minutes: "Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time."
The trouble, according to Ashworth, is that this could be interpreted two ways. The Fed could be talking about the present, in which case the June rate hike timing is probably off the table. Or it could be a past tense reminder that the reason the Fed has waited so long to normalize monetary policy is because of the fragility of the recovery -- something that isn't really news.
The correct interpretation should be revealed, and any confusion ameliorated, when Fed Chair Janet Yellen presents her semi-annual testimony to Congress on February 24-25. If the June rate hike isn't happening, we should see her focus on the recent softening of the economic data, as I discussed earlier this week.