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More traders see Fed taking a pass on September hike

Markets embraced the Fed minutes as a relatively dovish sign the central bank was not quite ready to move on raising rates back in July, but so far Wall Street economists' forecasts for a September hike are not changing.

"We still have a September call. We've thought it is a pretty close call for quite a while, and we still do," said JPMorgan economist Bob Mellman.

Stocks were lower and bond yields dropped, while traders bet the first Fed rate hike may now be later than September. The dovishness showed up in a big way in the two-year yield, trading at 0.65 percent after the release, down from 0.70 percent before the Fed minutes.

Read MoreFed 'approaching' hike, not there yet

"It's more of the same. They said they're not there yet. They need more data. It's getting closer. People thought if they didn't advance the ball now, then they would be running out of time. This would be seen dovishly because some people believe (the Fed) needed to start it now," said John Briggs, RBS head of strategy, Americas. "It's the fact they did not start the process more vehemently."

Trader on the floor of the New York Stock Exchange.
Lucas Jackson | Reuters
Trader on the floor of the New York Stock Exchange.

RBS economists expect the first rate hike in September, as do many Wall Street firms. Traders, however, have been changing bets daily on the timing.

"There were lots of uncertainties (in the minutes). I think there was nothing surprising," Mellman said, noting the Fed continued to point to the lack of inflation. He also said there were a lot of disparate views on the FOMC. "From our point of view, no one's made a decision and it doesn't look like Janet Yellen, as of July, tried to pull the group together in terms of making a decision."

Read MoreOdds of Sept rate hike decline after minutes

The dollar fell, reaching a fresh August low against the yen. The 10-year Treasury slipped to 2.15 percent and was briefly at its 200-day moving average at 2.138 percent. The minutes were released earlier than the normal 2 p.m. EDT by a news agency, and the headlines started moving at 1:37 p.m. EDT.

"I think that the market is emphasizing two parts to the minutes. One is where they said several wanted more signs of pressure on inflation, and the other was the downside risks from abroad and that was before the latest drop in oil prices and before the Chinese devaluation," said Marc Chandler, head of currency strategy at Brown Brothers Harriman.

Chandler said he still expects a September rate hike, adding the Fed was responding in its July meeting minutes to the Chinese economic weakness and stock market slump, which were known at the time.

"I think what the market is doing is reading the minutes through what we know now. What we know now is after the stock market slump, they devalued the currency and oil prices made new lows, sharply lower new lows. On the margin, you'll find a few people will feel more confident of no hike in September. I'm not there yet," Chandler said.

Read MoreYields tumble to session lows after Fed minutes

He said the Fed decision will hinge heavily on the August employment report and that will be the next big event for markets.

"The Federal Reserve cannot set monetary policy on what happens in Beijing or Riyadh, and it can't be decided by the day trader on the New York Stock Exchange or by the algos that can inject volatility into the stock market," Chandler said.

"What can change the psychology? I think we really have to wait until we have the jobs data," he said.

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RBS says its calculation of market pricing suggests traders are betting the first full rate hike by the Fed will now be in January. Before the Fed minutes, it had been priced in as December. The odds of a September rate rise fell to 36 percent from 45 percent Tuesday. The odds for December fell to 85 percent, from 100 percent before the minutes.

Gold firmed after the minutes, with futures up more than 1 percent at $1,129.50 per ounce.

The divide over the Fed's start date is intense, with a slight majority of economists leaning toward a September hike, according to CNBC's latest Fed survey. The disagreement makes any bit of new information that could help tilt the discussion all the more important. While JPMorgan and RBS are in the September camp, Goldman Sachs economists see December as more likely for a first hike.

There are just a few more big pieces of data the market is watching before the Fed meets on Sept. 16 and 17. The central bank has indicated it is data dependent making the information that most applies to its dual mandates of employment and inflation count the most. So first and foremost, markets are awaiting the employment report on Sept. 4, then PPI on Sept. 11 and CPI on Sept. 16.

Read MoreFed may have just gotten a red light for rate hike

George Gero at RBC notes the move in gold was due to the Fed's comment that it needs further improvement before raising rates, even though that is not a new remark. "So shorts covered previously sold positions and options in 1200 strike gold calls were busy," he wrote.

According to Bespoke, the stock market has had a mostly quiet reaction to the Fed minutes after the previous 13 releases since the beginning of 2014. The firm says that in that period, the S&P 500 has seen a positive average gain of 0.13 percent between the 2 p.m. release and the close, and it has been positive 75 percent of the time.

Overall, the S&P 500 has been up an average of 0.24 percent for the entire day of the Fed minutes release, with gains 54 percent of the time.

The last release of the minutes, however, was negative, and the S&P fell 1.7 percent on the day.