An emboldened Fed

The Federal Reserve minutes of the May meeting gave investors a pretty clear roadmap for the summer. The minutes, out Wednesday afternoon, painted a picture of an FOMC strongly focused on inflation, with rate hikes of 50 basis points in the June and July meetings. But some members also indicated that price pressures may not be getting worse.

Stocks rally: The market appeared to take the minutes as more dovish than hawkish. Half-point hikes were already priced in for the next couple of meetings and there was no mention of 75-basis-point moves that had become the base case for a few Wall Street banks at the end of April.

The S&P 500 (SPY) rose about 1% to finish out the session and S&P futures (SPX) are up again this morning. Treasury yields (SHY) (TBT) (TLT) continued to creep lower Friday.

Data dependence: "We think that after the July meeting the Fed is likely to become more 'data dependent' with regard to rate hikes, which essentially means that the policy path after July will depend upon the trajectory of inflation and progress toward correcting the supply/demand imbalances in the labor market," BlackRock fixed income strategist Bob Miller said.

There are already signs that the U.S. economy is weakening. Of the last 19 major economic indicators, 13 have missed economists' expectations, Nomura noted. The question is whether that will bring about a Fed pause, which stock bulls are hoping for, or will it stiffen the central bank's resolve.

If there are signs of falling inflation and improved labor market imbalances "the Fed gains some breathing room and can shift policy adjustments to 25 bps increments, while still pursuing something in the estimated range of neutral," Miller said.

Pantheon Macro economist Ian Shepherdson says the door is still open to a smaller hike in July given the minutes show policymakers "appear utterly oblivious ... to the rollover in housing demand, which has been evident in the mortgage applications data since the turn of the year." That will change in the June minutes, he added.

But Nomura strategist Charlie McElligott says those hoping for a Fed pause will likely be disappointed, noting Fed chief Powell's willingness to endure "some pain" in getting price stability.

"I think that if anything, the Fed is seeing the results of their (financial conditions index) tightening campaign through these broad measures 'slowing' and could actually become incrementally 'emboldened' to keep PUSHING on their hiking path until they see the 'whites of the eyes' of sustainably lower inflation as opposed to the notion of 'pausing and hoping' for the inflation data to move lower - a view that is increasing held by some in the market," he said.