May’s Fed Meeting Concludes With No Surprises

5/4/2022

Economy

0 min read



Image Credit: Federal Reserve (Flickr)

The FOMC Decision on Rates

The Federal Open Market Committee (FOMC) voted to raise overnight interest rates from a target of 0.25%-0.50% to the new level of 0.75%-1.00%. The monetary policy shift in bank lending rates was exactly as expected as Fed Chair Jerome Powell and other Committee members had been telegraphic the policy shift in advance of the two-day meeting. The early reaction from the bond market was almost lifeless as the UST 2-year and UST 10-year barely moved after the statement was released.

The statement accompanying the policy shift also included plans to shrink the Fed’s balance sheet. Once again, there was no surprise at the size of the reduction in bonds owned by the Fed. It will follow the exact schedule as outlined earlier. For Treasury securities, the cap of securities allowed to roll off the balance sheet will be set at $30 billion per month and, after three months, will increase to $60 billion per month. The decline in holdings of Treasury securities under this monthly cap will include Treasury coupon securities and, to the extent that coupon maturities are less than the monthly cap, Treasury bills.

For agency debt and agency mortgage-backed securities, the cap will initially be set at $17.5 billion per month beginning June 1, and after three months will increase to $35 billion per month.

Over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime.

The Committee also stated it is prepared to adjust any of the details of its approach to reducing the size of the balance sheet in light of economic and financial developments.

Take-Away

Higher interest rates can weigh on stocks as companies that rely on borrowing may find their cost of capital has increased. Additionally, investors that would prefer the “known” result of investing in the bond market or other interest rate products may pull assets out of stocks if they are attracted by the fixed income alternative. Investor money leaving the stock market reduces demand.

The next FOMC meeting is also a two-day meeting that takes place June14-15. If the pace of employment and overall economic activity is little changed, the Federal Reserve is expected to again raise interest rates.

Paul Hoffman

Managing Editor, Channelchek

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