March FOMC Minutes
Yesterday afternoon, the S&P 500® Index (SPX) (Figure 1) embarked upon an aggressive rally that erased much of the losses from last Friday’s 1897.28 all-time high to Tuesday’s 1837.49 intraday low. The catalyst for the gain was the release of the March FOMC minutes. Within the April capital markets calendar “Is 2010 the template for 2014,” I raised questions:
“Will the minutes from the March meeting support Yellen’s comments made after that meeting that the Fed could start to raise rates about six months after the end of its bond purchase program? Is that timing in the minutes, or did she just say it at the press conference?”
It is obvious from reading the minutes that Fed Chair Yellen was speaking “off the cuff” at her post-meeting press conference. Her usage of “six months” is not to be found anywhere in the minutes. Additionally from the minutes, it seems that the committee directed investors to ignore the “dots,” in reference to a series of dots on a FOMC chart that displays fed funds rate projections, or forecasts, for the next few years. At the March 19 meeting, the committee raised the end of 2015 consensus for the fed funds rate from 0.75% to 1.00%. For the end of 2016, the consensus fed funds rate was raised 50 basis points from 1.75% to 2.25%.
For now, yesterday’s release of the FOMC minutes has alleviated some of the downside pressure the SPX has been challenged by this week. However, I do not suspect it is an all-clear signal. The month of April will have some obstacles for the markets to overcome, ranging from Japanese policymakers’ response to the April 1 consumption tax hike to the sustainability of profit margins for SPX companies at 9.56% (Figure 2). On April 30, investors should expect another round of Fed asset purchase tapering, as well as an acknowledgement that the recent weather impact on the economy is transitory, which weakens the extremely dovish “lower for longer” argument.
Figure 1: S&P 500 Index (SPX) Prior 52 Weeks
Figure 2: S&P 500 Index (SPX) Profit Margins 1994-2014