Here's why Fed minutes looked dovish to some

The bond market seems to have heard a dovish undercurrent in the Fed minutes, while stock traders seem to think they got the central bank's message right the first time.

Stocks rallied hard Wednesday after ADP data showed 241,000 private sector jobs were created in December, raising speculation the government employment report would pack a positive surprise Friday. Economists expect the economy added about 240,000 nonfarm payrolls in December.

The Fed minutes, released at 2 p.m. ET, got little reaction from the already buoyant stock market but did cause a slight steepening at the front end of the Treasury yield curve.

"Well, they didn't hear hawks," said Ward McCarthy, chief financial economist at Jefferies.

"What they heard was a bunch of confused people, and I think that is dovish because it means they're indecisive and noncommittal, and they frankly don't know what they're going to do or when they're going to do it ... they can't get their hands around inflation prospects. Based on the economy, they can see raising rates on the radar screen but based on inflation and given they have a dual mandate that really muddles the picture."

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The Fed did emphasize that it could raise rates even with low inflation and that it expects it to be transitory, along with low oil prices.

Traders work the floor of the New York Stock Exchange.
Getty Images
Traders work the floor of the New York Stock Exchange.

"The minutes to the Dec. 16-17 FOMC weren't particularly electrifying, though they did note that rate hikes might begin even when core inflation is near its current depressed levels, provided the Fed is confident that inflation will move higher over time.

This latter condition likely means that so long as above-trend growth continues to put downward pressure on the unemployment rate," wrote JPMorgan's chief U.S. economist, Michael Feroli.

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The stock market has been soothed by the notion the central bank will move slowly to hike rates. "I think the issue again at this point, the issue isn't really the date of liftoff, so to speak. ... It's the path and they emphasized in the minutes that even after they begin to tighten, policy is going to be extremely accommodative. So the issue again is it's slow and steady," said Daniel Greenhaus, chief global strategist at BTIG.

Adrian Miller, managing director, fixed income research at GMP Securities, said the minutes did eliminate concerns that the Fed could raise rates as early as April. Fed Chair Janet Yellen said during a presser after the December meeting that the central bank would not be ready to move for a couple of meetings, and some in the market literally took that as the Fed could raise rates after two meetings—or in April.

The market read some of the Fed's commentary about overseas conditions as dovish. "There were more comments from some and a few participants on the knock-on affect to U.S. growth, and while that wasn't reflected in the policy statement, it's dovish. Behind the scenes there was far more concern than we were led to believe from the policy statement that that was going to be one of the risks," said Miller.

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David Ader of CRT Capital said the market was focused too much on the Fed's comment about global growth. He said it's logical that the central bank would be more concerned about global growth but it's not a new development.

The Fed minutes said: "While some participants had lowered their assessments of the prospects for global economic growth, several noted that the likelihood of further responses by policymakers abroad had increased. Several participants indicated that they expected slower economic growth abroad to negatively affect the U.S. economy, principally through lower net exports, but the net effect of lower oil prices on U.S. economic activity was anticipated to be positive."

Ader said in a note the Fed is not trying to send a cryptic message. "Rather, they're saying they expect something from Europe and by couching this all with lower oil price impact being positive we'd wouldn't read much dovishness into it. That said, since we last wrote 2s/5s is a bit steeper, 5s/10s a bit flatter," he said.