The stock market on Wednesday loved the Federal Reserve’s most recently published opinion on the economy and interest rates — for an hour.
But then Wall Street changed its mind.
Right after the Fed at 2 p.m. released the minutes of its last meeting, the Dow Jones industrial average soared to a gain of 303 points. But at around 3 p.m., it all went south.
By the closing bell, the Dow was down 169 points and investors were looking around to see what just ran over them.
What happened? The stock market looked over at the bond market and was taught a lesson.
Let’s go back to right after the minutes came out.
Stock market intelligentsia determined from the minutes of the last meeting that the Fed is on board to keep interest rates friendly to Wall Street. The new conclusion — until there’s a newer one — was that there will now be only three interest rate hikes this year and not four.
Ah, but wait a minute.
Those minutes were from Fed meetings on Jan. 30 and 31. Since that last Fed meeting, a number of things have changed. For one thing, the last employment report was stronger than expected.
And even though I’ve already proven that the gain of 200,000 jobs in January and the surprisingly strong boost in wages were misleading, the Fed wouldn’t have known about the January employment report at the last meeting.
The Labor Department didn’t announce those 200,000 new jobs and the wage increases until later that week.
There have also been a couple of stronger-than-expected inflation reports — as well as questions over a federal budget, which is still pending — since the Fed put together those minutes.
So, believing the opinion of the minutes released on Wednesday is like looking at the weather forecast for the end of January before deciding what to wear today.
The minutes are I-R-R-E-L-E-V-A-N-T. It took the stock market an hour to figure that out.
Just to show you how out of date these last minutes are, here’s a line from the document: “Equity prices recorded further significant gains.” In fact, the stock market nearly crashed the week after that Fed meeting.
The tax cuts haven’t yet had much of an impact on the economy or prices or job growth. But if the cuts do boost the economy, as they are supposed to, the next few Fed-meeting minutes aren’t likely to be so friendly.
Everything I just wrote is probably the reason that bond prices fell Wednesday — and yields rose — after the Fed notes were released. Yields have been rising steadily for months as the bond market, which is usually wiser than its stock counterparts, worries about what the Fed is going to be forced to do.
Rates on the government’s 10-year note are now at 2.94 percent. The 30-year bond is yielding 3.215 percent, and the two-year bill is sitting at 2.82 percent. That two-year yield is the highest since September 2008.
And we all know what happened back then.
Four rate hikes, or maybe more, are still on the table. The bond market understands what the stock market doesn’t.