Fed Minutes Say Shrink Balance Sheet and Raise Rates

U.S. equity traders are showing a bullish response to the release of the Fed Meeting Minutes from its April Federal Open Market Committee meeting. The most bullish component of report is the Fed’s plan for scaling back its massive $4.5 trillion sheet.

According to the minutes from its May 3 meeting, the central bank sees a system where it will announce cap limits on how much it will allow to roll off each month without reinvesting. Any amount it receives in repayments that exceeds the cap limit will be reinvested.

Investors liked the news and the Fed’s plan to modulate their balance-sheet shows the Fed is not on auto-pilot and will still be able to make key decisions as needed. Traders essentially liked the flexibility provided by the plan.

Stocks rose sharply after investors digested the minutes, led by the real estate sector. The Fed’s plan to gradually raise rates is being well-received by real estate investors who may have been expecting a faster pace for scaling back the Fed’s balance sheet.

U.S. Treasury investors also liked the Fed’s plan because of the options it gives the central bank. U.S. government debt prices rose on Wednesday after the release of the minutes from the Federal Open Market Committee’s FOMC meeting in May.

This drove the benchmark 10-year note yield to 2.2255 percent, while the short-term two-year yield dipped to 1.273 percent. Both yields were higher into the release of the minutes.

The second part of the minutes contained the Fed’s discussion of interest rate policy. According to the minutes most Fed officials said it would “soon” be time to raise rates again, a signal that the majority of the central bank members remain resolute about hiking rates at their next meeting in June.

Additionally, Fed officials said the economy would rebound from the weak first quarter and most officials thought that soft March inflation data was not the start of a new trend.

While shrinking the balance sheet may have had broad support from Fed members, the discussion of the outlook showed widening divisions among Fed officials, with “several” seeing a possible need to start raising rates at a faster pace, and others advising the Fed to slow down.