Investors reacted favorably to the release of the Federal Reserve's March meeting minutes on Wednesday, sending stocks back to the upper end of their recent trading range. The recent weakness in big tech and biotech stocks were largely forgotten, as were concerns over the start of the first-quarter earnings season and renewed tensions in Ukraine. Instead, the promise of lower short-term interest rates reinvigorated animal spirits.
Investors were worried that the minutes would confirm the takeaway from the March policy announcement and press conference -- which featured new Fed chairman Janet Yellen's first appearance -- that the central bank could raise short-term interest rates as soon as the first half of 2015. Investors based this notion not only on comments from Yellen but from the individual interest rate projections of Fed policymakers themselves.
This early 2015 timeframe was about six months sooner than Wall Street had priced in, which caused stocks to slide and the futures market to reexamine what it thought about the future path of interest rates.
Since then, Yellen has tried to backtrack a little, focusing on the ongoing problems in the labor market not captured by the headline unemployment rate -- things like stagnant wages, the collapse in the labor force participation rate and the ongoing plight of the long-term unemployed.
So here's the kicker: While the contents of the minutes themselves were largely a mixed bag, the details suggested that a debates continues among Fed policymakers about the health of the job market, the amount of slack in the economy and whether early 2015 or late 2015 is the right time to start raising short-term rates from near zero percent, where they've been since 2008.
The hawks, or those more worried about inflation and who favor earlier rate hikes, stood by the shift in the individual interest rate forecasts as being reflective of the unemployment rate's recent drop. They believe this represents an improvement in the labor market that warrants a more aggressive path for moving interest rates back toward more normal levels.
The doves, or those more worried about economic growth and who favor later rate hikes, worried that the shift in the individual rate forecasts would spook the market into thinking that the Fed was moving to a less accommodative policy stance too soon.
It was the fleshing out of this ongoing disagreement that bolstered stocks, on the hopes that the debate will delay any action and keep the cheap money spigots all the way open.
It's been a familiar story over the last five years. The Fed hints that more cheap money is coming, and stocks rise. The reverse has been true as well.
All the major sell-offs since stocks bottomed in early 2009 have occurred during periods when the Fed has been holding back. In 2010, after the end of the first round of bond-buying stimulus, the S&P 500 lost 16 percent. In 2011, after the end of the second round of bond buying, stocks lost 19 percent. And in 2012, before the third round of bond buying started, stocks lost 10 percent.
The cheap-money junkies on Wall Street have been growing increasingly nervous about developments over the last few months. Former Fed chairman Ben Bernanke has departed. The third round of bond-buying stimulus -- dubbed "QE3" -- is now winding down. And the economic data has rolled over in a way that investors haven't seen since 2012. Much of the weakness has been blamed on winter weather, but it could be a sign that cheap money isn't having the same stimulative effect on growth that it once did.
So, last month's slightly-more-hawkish-than-expected policy announcement and shift in the rate hike timing rattled many cages. Today's meeting minutes allayed some of that fear.
But the fact remains: Money is soon going to get more expensive. It's just a matter of timing.
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