MarketView for May 21

Summary

The markets rallied sharply on Wednesday, rebounding from the previous day's broad selloff, after minutes of the Federal Reserve's last meeting showed central bankers have discussed the eventual tightening of monetary policy but made no decisions on which tools to use.

The Dow Jones Industrial Average rose 1 percent, its largest daily percentage increase since mid-April. Goldman Sachs was the top gainer on the blue chip index, up 1.9 percent at $159.35.

Minutes of the Fed meeting indicated that the Fed staff presented several approaches to raising short-term interest rates, but said the discussion was simply "prudent planning" and not a sign rate hikes would come any time soon.

With the day's gain, the S&P 500 was up for a third session out of four. However, the broad market index was still off about 1 percent from its record intraday high on May 13.

Retail was once again in the spotlight. Tiffany rose  9.1 percent to $96.30 as one of the best performers on the S&P 500 after the jewelry retailer raised its full-year earnings forecast.

Target reported lower quarterly earnings but showed signs of progress in efforts to rebuild customer confidence. The stock ended 1 percent higher at $57.20.

Despite a better-than-expected first-quarter earnings season, Bank of America-Merrill Lynch gave a cautious outlook on prospects for the rest of the year and 2015. It forecast S&P 500 profit growth of 8 percent for both 2014 and 2015, below analyst consensus for both years. On average, analysts expect earnings to grow 9.1 percent this year and 11.4 percent in 2015, according to Thomson Reuters data.

Roughly 96 percent of all the S&P 500 companies have reported results, with profit growth this quarter of 5.5 percent and revenue up 2.8 percent, according to Thomson Reuters. While more companies have topped earnings expectations than usual, fewer have exceeded expectations on the revenue side.

Approximately 5.2 billion shares changed hands on the major equity exchanges, a number that was below below the month-to-date average of 6 billion shares according to BATS exchange data.

Fed Engaged in “Prudent Planning”

Federal Reserve policymakers last month began laying groundwork for an eventual retreat from easy monetary policy with a discussion of how to best control interest rates as they remove trillions of dollars from the financial system.

No final decisions were taken, and minutes of the session, released on Wednesday, said the Fed was merely engaged in "prudent planning" and not signaling it was ready to "normalize" monetary policy or raise interest rates any time soon.

Still, the discussion at the central bank's April 29-30 policy-setting session, coupled with fresh comments by top officials, show an intensifying discussion over both exit-strategy details and a developing split over basic analysis of the economy.

The next policy meeting will be in mid-June, when the panel will be joined by Stanley Fischer, the former Bank of Israel governor whose nomination to the Fed's board was confirmed on Wednesday by the Senate. The Senate has yet to act on his separate nomination to be Fed vice chairman.

Though the economic forecasts reviewed at the April meeting remained upbeat, the minutes indicated general agreement that any sustained uptick in inflation was still perhaps years off.

Minneapolis Fed President Narayana Kocherlakota said on Wednesday he did not think the Fed's preferred measure of inflation would reach 2 percent until 2018, an argument for leaving loose monetary policy in place. He said the economy's struggle to regain steam might even argue for easing policy further by committing to drive inflation above the Fed's 2 percent target to make up for lost ground.

Participants in the meeting undertook an apparently wide-ranging discussion about the labor markets, dissecting research that suggests a falling share of short-term unemployed could prove an inflationary spark even with long-term joblessness running unusually high - a finding a number of officials said they considered suspect.

Sluggish wage gains were cited as one indication that the labor market could have more slack than the nation's 6.3 percent jobless rate suggests.

Other officials, however, offered warnings. "Some participants reported that labor markets were tight in their districts or that contacts indicated some sectors or occupations were experiencing shortages of workers," the minutes reported.

The discussion over how to exit the Fed's highly accommodative policy is the latest sign that the era of near-zero rates and heavy bond buying is drawing to a close. Having pumped trillions of dollars into the financial system, the Fed must now develop tools to siphon them out as part of the eventual decision to raise target rates.

"Participants generally agreed that starting to consider the options for normalization at this meeting was prudent," the Fed said. It added that the discussion "did not imply that normalization would necessarily begin sometime soon."