NEW YORK (Reuters) – Federal Reserve officials “generally agreed” last month to trim $60 billion per month from the U.S. central bank’s Treasury holdings and $35 billion from its holdings of mortgage-backed securities, with the amounts phased in over a period of three months “or modestly longer,” according to minutes of the March 15-16 policy meeting.
Participants also “generally agreed” that after the balance sheet runoff was “well underway” it would be appropriate to consider outright sales of MBS, according to the minutes, which were released on Wednesday.
No final decision was made, the minutes said, but officials made “substantial progress” and could “begin the process of reducing the size of the balance sheet as early as after the conclusion” of the May 3-4 policy meeting.
STOCKS: The S&P 500 extended losses after briefly paring, and was 1.53% lower
BONDS: The yield on the 10-year Treasury note rose to 2.6144%. The 2-year note slipped to 2.5244%.
DOLLAR: The US dollar index extended a gain to 0.26%
JOHN LUKE TYNER, FIXED INCOME ANALYST, APTUS CAPITAL ADVISORS, FAIRHOPE, ALABAMA
“My biggest takeaway is that when the fed talked about the potential need for 50 basis point hikes, it was sort of explicitly clear that it wasn’t at every meeting from here on out. And when you started to see some of the verbiage and some of the Fed funds pricing and futures pricing for the rest of the year, you were getting some uber-hawks out there that were thinking even more than 250 basis points Fed funds rate by the end of the year. Now that sort of gives way that maybe they are going to try and use some of the balance sheet reduction to offset some of the need to hike so fast. I don’t know exactly what it means for risk assets from here.”
“We have gotten spoiled with the amount of liquidity the Fed has pumped into the market and it’s like staying out late and drinking – it is all good until the hangover kicks in – and we are sort of at the place where the hangover is kicking in. And while the economy is doing fairly well it is a tighter liquidity type of scenario.”
RYAN DETRICK, CHIEF MARKET STRATEGIST, LPL FINANCIAL, CHARLOTTE, NORTH CAROLINA
“We finally have a firm number: $95 billion a month, is (the rate at which the Fed) is going to shrink the balance sheet and in all likelihood will start next month. So now we have a firm number to the tapering we’ve been talking about for quite some time now.”
“Yields were higher once again, with jitters in the bond market over the potential tapering, and the impact it could have on the market when the largest holder of bonds begins to sell.”
“There’s a realization that some of the doves have come over to the 50 basis point (interest rate) hike territory and that is likely what we’re going to see at the next several meetings going forward as inflationary pressures remain elevated.”
“The Ukraine conflict uncertainty likely prevented a 50 basis point hike last month, so it could put a little cold water on extremely hawkish policy. But still, we know multiple hikes are coming very soon.”
“10-year yields continue to soar higher, punishing growth stocks.”
JOE SALUZZI, CO-MANAGER OF TRADING, THEMIS TRADING, CHATHAM, NEW JERSEY
“The bonds are saying this wasn’t as bad as anticipated. Stocks will jerk around like this and go back and forth for a while just because it’s mostly algorithm trading and a lot of people just chasing others around.”
“Fed minutes could have been a lot worse and the market at this point sees it as a little bit of a relief…Yesterday her (Brainard) comments were fairly hawkish and today these minutes appear to be pretty much in line or actually a little bit maybe less hawkish than what the market expected when it comes to balance sheet reduction.”
ALAN LANCZ, PRESIDENT, ALAN B LANCZ & ASSOCIATES, TOLEDO, OHIO
“Looks like they delayed a 50-point increase because of the Russia-Ukraine conflict, which makes sense. I don’t think there’s really anything earth shattering… I think people are reading it, and realizing it’s not really a change in stance. Yesterday’s (news) was much more material to investors and their psyche than the release of the minutes. I don’t think there’s anything material that would garner a change in sentiment.”
TIM GHRISKEY, SENIOR PORTFOLIO STRATEGIST, INGALLS & SNYDER, NEW YORK
“There’s nothing new here from what I see, and that’s probably why the market is not reacting. But clearly we’ve got rate hikes ahead of us, and we have a shrinking balance sheet ahead of us. The Fed is determined to rein in inflation, and we just hope and pray that there will there will be a soft landing of the economy and not a hard landing that sends us into a recession.”
(Compiled by the U.S. Finance & Markets Breaking News team)