Upon release of the December 2012 FOMC minutes the stock market reversed course and closed down on Thursday, after initial gains. The rapid drop was a reaction, or overreaction, to a consensus among FOMC members that QE3 will end in 2013. Aside from the fact that the market could have read this sentiment as optimism about a growing economy, rather than an end to free cash, the reality is that the FOMC that made these statements in December is not the same group of people making decisions in 2013.
While many Fed-watchers will note that the 2012 FOMC was rather dovish (save for Richmond Fed President Jeffrey Lacker), the 2013 FOMC is even more dovish. With Boston Fed President Eric Rosengren and Chicago Fed President Charles Evans as voting members, the committee has the two most dovish members of the 19 member body voting this year. Historically, James Bullard of St. Louis has been a fair weather voter, always on the side of the majority in recent years, thus indicating that he is either a trend setter or a brilliant follower. Either way, he is not a hawk. The only remaining question mark is Esther George of Kansas City. Her predecessor was a hawk, but her public statements thus far have failed to indicate that she will be nearly as outspoken. So, we are left with an even more dovish committee in 2013 than in 2012.
All in all, this means that investors should take the December 2012 FOMC minutes with a grain of salt. The 2013 committee is even less inclined toward tightening than was the 2012 committee that extended Twist and instituted unending QE3. So, while it remains possible that QE3 will halt in 2013, investors should really brace for tighter monetary policy when the committee turns hawkish in 2014.