Financial Market

FOMC Meeting Minutes Released – Here’s how the stock market reacted

The Federal Open Market Committee (FOMC) minutes released on May 25, 2022 pertaining to the May 3–4, 2022 meeting struck the right chord with the investors. The Dow 30, S&P 500 and Nasdaq Composite all ended green after posting gains of 0.60 per cent, 0.95 per cent and 1.51 per cent respectively.

After the Federal Reserve’s minutes revealed that the central bank is not getting more aggressive in tightening monetary policy but sticking to its commitment to lift short term rates, the markets rejoiced. In a rising interest rate environment, the economy may get hit while the FOMC minutes are not indicating that kind of a scenario as of now.

Here are a few snippets from the FOMC meeting minutes held on May 3-4, 2022.

Monetary policy expectations in the United States: Federal Reserve communications since the March FOMC meeting were perceived as signaling a more rapid removal of policy accommodation than had been expected, resulting in significant shifts in expectations regarding the path of the federal funds rate. For the current meeting, federal funds futures implied around 50 basis points of policy rate tightening

Fed’s Balance sheet: Regarding the outlook for runoff of the Federal Reserve’s securities holdings, market participants widely expected the Committee to announce the commencement of balance sheet runoff at the current meeting. Median survey responses suggested that most market participants anticipated maximum redemption caps of $60 billion per month for Treasury securities and $35 billion per month for agency mortgage-backed securities (MBS), with the caps phased in over roughly three months.

U.S. financial market developments: Financial conditions tightened notably over the period. Treasury yields increased across the curve, with the rise primarily reflecting higher real interest rates. Longer-term private borrowing rates also moved higher, with 30-year fixed-rate mortgage rates rising above 5 percent to the highest levels in over a decade. Equity indexes ended the period substantially lower, on net.

U.S. Inflation: Expectations continued to project a significant deceleration in inflation in the coming years. Nonetheless, far-forward inflation compensation rose over the period, and market participants remained attentive to the risk that, in bringing inflation back to 2 percent, the Committee would need to tighten by more than currently expected.

All participants of FOMC agreed that it was appropriate to raise the target range for the federal funds rate 50 basis points at May 3-4 meeting.

Participants also agreed that it was appropriate to start reducing the size of the Federal Reserve’s balance sheet on June 1, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet.

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