Commentary - FOMC Minutes, Much Ado About Something

There was a sigh of relief in the market after the release of the minutes of the March 22 FOMC meeting. The yield on 10-year treasuries fell 10 basis points (see the chart) to 3.35% and S&P 500 rose 20 points to 1,188 (see the chart) following the 2:00pm release. The FOMC statement on March 22, which gave a hint of concerns at the Fed over inflation - "pressures on inflation have picked up in recent months and pricing power is more evident" - was then interpreted by the market as a prologue to a more aggressive Fed. Such fear turns out to be unfounded. The detailed discussions show that the Greenspan Fed is still very bullish on productivity growth. While acknowledging strengthening economy, improving labor market and rising oil prices, the Fed contends that inflation should remain in-check because of productivity gains. As the Fed says,

"Although the required amount of cumulative tightening may have increased, members noted that an accelerated pace of policy tightening did not appear necessary at this time, as a degree of economic slack apparently remained, productivity growth would probably continue to damp increases in unit labor costs and prices, and inflation would most likely continue to be contained. In these circumstances, Committee members judged that the measured removal of policy accommodation was appropriate for now."

This suggests that the Fed will be much less aggressive in raising rates, much like in the late 1990s when Greenspan despite pressures from Keynesian types like Larry Meyer kept the rates low in the face of below-4% unemployment rate. The consequences were obvious, bonds went up, stocks went up, and VIX went down.