What do FOMC ‘minutes’ Mean for the Stock Market?

When the Fed might begin unloading its bond holdings has fast become a red hot topic. The “minutes” released yesterday from the central bank’s December meeting indicate nearly all members favor starting the balance sheet reduction as soon as this year.

Monetary policy tightening

Investors largely view this sort of action as a form of monetary policy tightening designed to slow the economy and most believed it was still at least a year or even two away.

The Fed is currently on track to stop adding to its nearly $8.2 trillion worth of Treasuries and mortgage-backed securities by mid-March.

For what it’s worth, this is only the second time in its history that the Fed has embarked on an asset purchase “taper” program. After completing the previous (and first) “taper” in 2014, the Fed essentially maintained its balance sheet until 2018, when it began allowing some bonds to roll off. That was ended in 2019 however, when demand for bank reserves outstripped the Fed’s supply, causing volatility in short-term money markets and forcing the Fed to again add to its balance sheet.

Not surprisingly, investors are worried about the Fed once again making a misstep, especially considering that its balance sheet is twice the size it was in 2018.

It’s also worth noting that the Fed hasn’t lifted its benchmark interest rate since 2018.

Interest rates hike

Wall Street currently anticipates anywhere from two to four rate hikes this year, so this is another area where investors worry the central bank could get it wrong. The possibility that they simultaneously attempt to both raise rates and reduce asset holdings means double the chances of missing the mark.

As there is no Fed policy meeting in February, many Wall Street insiders fear that officials could move too aggressively at the upcoming January 25-26 meeting as they face increasing pressures to beat back inflation.

Nothing in recent data provides a reason the Fed might suddenly strike a more dovish tone, either. That includes the job market, which has struggled to return to pre-pandemic levels and which many bulls have hoped might sway the Fed to maintain supports for longer. However, even with nearly 4 million fewer jobs than what the U.S. had in January 2020, the Fed considers the labor market to be mostly healed.

Yesterday, ADP‘s private payroll report showed that employers added almost +900,000 workers in December, which is more than double the +400,000 gain expected from the Labor Department’s official report due on Friday. While the two data sets have diverged greatly in recent months, Friday’s report is still largely expected to exceed expectations.

Today, investors will be digesting the ISM Services Index. Most attention will be focused on the “prices paid” component, which fell slightly in November but was still the third-highest reading ever recorded. Other economic data today include International Trade and Factory Orders. Finally, earnings worth noting include Bed Bath & Beyond, Bridgestone, Conagra, Sanderson Farms, and Walgreens.