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Fed minutes could jolt complacent markets

All eyes will be on the Fed at 2pm. Markets continue to track the "will they or won't they" tapering discussion, and recent speeches from Fed chairman-elect Janet Yellen, and current chairman Ben Bernanke, have sent stocks flying on expectations that quantitative easing will remain untouched well into next year.

But the release Wednesday of the minutes from the October FOMC meeting could provide a rude awakening. The minutes will add colour to an October statement that revealed a confident Fed, one that seemed unfazed by the U.S. government shutdown earlier that month.

Last week, Janet Yellen's testimony to the Senate Banking Committee proved even more dovish than anticipated. "We have made good progress, but we have farther to go," Ms. Yellen warned. "Unemployment is down from a peak of 10 per cent, but…it is still too high, reflecting a labour market and economy performing far short of their potential."

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In response, investors pushed U.S. indexes to new all-time highs, as fears that QE may be scaled back in December of January were somewhat eased.

Mr. Bernanke chimed in yesterday, jolting stocks up again. "The FOMC remains committed to maintaining highly accommodative policies for as long as they needed," Mr. Bernanke said, in a speech to the National Economists Club.

Markets may have jumped too soon. The October FOMC statement repeated that "economic activity has continued to expand at a moderate pace" and that "asset purchases are not on a pre-set course." The Fed's optimistic tone in October is significant; the Fed didn't even mention the government shutdown in its text.

Recent comments from other Fed members also reveal a more ambivalent Fed.

St. Louis Fed president James Bullard warned that "it is certainly possible" that December could bring a taper, in a Nov. 4 Wall Street Journal interview. On Nov. 1, Philadelphia Fed president Charles Plosser told CNBC that the Fed "clearly missed" an opportunity in September to taper, and that the delay was "worrisome." Most surprisingly, on Nov. 12 a historically-dovish Dennis Lockhart, president of the Atlanta Fed, said "discussion of tapering could very well take place" next month.

Stocks didn't get the memo. The S&P 500 is up 6 per cent since the Oct. 4 Fed meeting, and S&P 500 and Dow Jones Industrial Average both broke new record highs last week. This afternoon's communique could shift the tides back towards a December taper, if the Fed's hawks have any say in the matter.

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