How soon will the Fed hike rates again? Minutes may offer clues
Investors wondering what the Federal Reserve’s next move is on interest rates and its massive bond holdings will comb the minutes of its May 2-3 meeting in search of clues.
Investors, according to bets placed in future markets, think it’s likely that the Fed will boost its key interest rate another quarter point when at its next meeting in mid-June. Currently, they are placing an 83% chance the Fed will lift its short-term rate, currently in a range of 0.75% to 1%.
More on what rate hikes mean to consumers:
What a Fed rate hike means for you (get ready to pay more)
What a rate hike means for mortgage rates
But it’s not just the pace and timing of rate hikes that Wall Street will be wondering about. The Fed has already said that it is working up plans to start reducing its massive $4 trillion-plus holdings of mortgage-backed bonds and longer-term U.S. government bonds.
And Wall Street will be looking to the minutes from the Fed meeting three weeks ago for any hints as to “when and how the Fed plans on shrinking” its holdings, says Stephen Wood, chief market strategist at Russell Investments.
Despite all the political news that has been moving markets lately, Wood says the Fed is “still the primary story for the market, even though they are not in the news every day.”
The combination of interest rates moving higher and the Fed eventually starting to sell the bonds now sitting on its books could either be disruptive or a non-event for markets, depending on how the Fed proceeds and if prepares the market properly for what comes next. “The Fed is gradually preparing the market for that change,” says Wood, adding that sales of bonds impacts the fixed-income more directly because it will increase the supply of bonds for sale, which ”can effect bond prices and interest rates.”
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