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As is often the case, the news is read, at least initially, to support one's previously held beliefs. The market's initial read of the headlines minutes from the FOMC was to confirm expectations that the Fed will being tapering next month. The Treasury market sold off, dragging stocks down as well, and sending the dollar higher in the foreign exchange market. Thin market conditions exaggerated the moves, which were quickly retraced.

It seems that many are focusing on the broad support Bernanke's time line enjoys at the FOMC. Yet, this was already taken for granted. In fact, what was striking was the differences of opinion--from economic assessments to inflation outlook.

Moreover, we think political realism requires recognizing that not every one is equal. We have identified a three person bloc, a troika, that is the key - Bernanke, Yellen and Dudley (BYD). They guided the Fed. This is not to say that others, like Evans or Bullard, for example, have not had influence, but rather it has been more limited and co-opted. BYD have tended to emphasize the data dependency of their decision over a date-dependency view.

The case for Fed tapering is well known. There are at least three non-exclusive variants. The Fed needs to taper because of technical issues often tied to the reduction supply as a function of a smaller than expected deficit. There is a camp that has never been in favor of QE3+ and are happy to see it end. For them, the sooner the better. Some have genuinely been swayed that the risks of QE continuing may be outweighing the benefits as the economy gains traction.

We have tried to sketch out a more skeptical view. First, it is a question of risks and probabilities. The Federal Reserve, Bernanke's timeline, which enjoys broad support, is simply that if the economy continues to do what the Fed expects, a reduction of purchases of long-term assets could begin later this year, not necessarily in September.

We think this leaves investors vulnerable to disappointment in terms of 1) timing, 2) the amount, and 3) even if the Fed does what is expected, it has been largely discounted.

Second, the most important change in the last FOMC statement was the upgrading of concern about the soft inflation readings. Inflation, as Bullard noted recently, is not yet moving back to the Fed's target.

Third, the economic performance is quite mixed presently and, there is risk, that the Fed cuts its growth forecasts for this year, even though they will likely stick to the view the economy is accelerating. The minutes bear out the idea that officials have less confidence than in June.

Fourth, the Fed exited Q1 and Q2 prematurely. Proof of this is that it later decided to resume purchasing long-term assets. For various reasons, it may be difficult to resume purchases for yet another round. Waiting another month for more data, or less ambiguous data.

Fifth, we have suggested that the Bernanke Fed's mark is the unorthodox measures taken to avoid deflation and a depression (however defined). Any good will, anti-inflation credentials, would be lost on Bernanke. From a game theory point of view, the signal of a new phase of monetary policy would be more convincingly sent if the next chairman oversaw the tapering.

Ultimately, the market's knee jerk reaction to the FOMC minutes was more a function of short-term market positioning than new insight. This is noise. Still awaiting the signal.

Source: FOMC Minutes: Knee-Jerk Reaction Unwound