Fed Minutes Stomp On the Market

 |  Includes: IYY, SPY
by: Average Joe Investor

Yikes! I stepped away from my computer for a bit to have a nice West Coast lunch and I come back to headlines like "Ahhhh, the Fed Minutes!!!! Freefall! We're all going to die!"

Ok, I exaggerate.

But seriously, the Fed Minutes, which usually don't have much of an effect on the market, seriously stomped the market when they were released late in the day yesterday. So here's the quick Average Joe breakdown:

So the Fed Minutes are basically the notes taken when the Fed meets to discuss their target for the Federal Funds Rate. They review what's going on in the economy and discuss the factors that play into deciding whether to raise, lower, or keep steady the target for the Fed Funds Rate.

Right now, everyone is very focused on the Fed due to the condition of the credit market. Many believe that to keep the economy righted, the Fed should cut rates at its September meeting. This would supposedly shore up liquidity in the credit markets and generally ease fear, two things that could work together to put a hurting on the economy.

The problem yesterday was that reading the minutes painted the picture of a Fed that was fairly comfortable with the state of the economy -- despite knowing the risks it was facing -- and still had its eyes fixed on inflation. Upon reading this, everyone immediately started worrying that this meant that the possibility of a rate cut in September was out the window.

Now I'm not going to get into a discussion here about whether a rate cut in September is an absolute necessity, but the key to point out is that the Fed meeting, and therefore the minutes, was on August 7th. On August 17th, the Fed found that conditions had deteriorated to the point that the Fed decided to cut the discount rate (the rate that the Fed charges the banks that it lends to). They also released the following statement:

"Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."

Draw your own conclusions, but I would be more apt to go with the Fed's statement from August 17th than to read a lot of meaning into what it had to say ten days earlier.