FOMC Meeting Minutes Released – Here’s How the Stock Market Reacted

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

After Federal Reserve minutes revealed the central bank was not becoming more aggressive in tightening monetary policy but was sticking to its commitment to raise short-term rates, markets rejoiced. In a rising interest rate environment, the economy could be affected as the FOMC minutes do not indicate this kind of scenario at this time.

Here are some excerpts from the minutes of the FOMC meeting held on May 3-4, 2022.

Monetary policy expectations in the United States: Communications from the Federal Reserve since the March FOMC meeting were seen as signaling a faster-than-expected removal of accommodative policy, leading to significant shifts in expectations for the path of the fed funds rate. For the current meeting, fed funds futures implied about 50 basis points of policy rate tightening

Fed balance sheet: Regarding the outlook for the liquidation of Federal Reserve securities holdings, market participants generally expected the Committee to announce the start of the balance sheet liquidation at the current meeting. Median survey responses suggested most market participants were planning maximum redemption caps of $60 billion per month for Treasuries and $35 billion per month for mortgage-backed securities. (MBS) from agencies, with staggered ceilings over approximately three months.

Evolution of the American financial market: Financial conditions tightened considerably over the period. Treasury yields rose across the curve, with the rise primarily reflecting higher real interest rates. Longer-term private borrowing rates also rose, with 30-year fixed-rate mortgage rates rising above 5% to the highest levels in more than a decade. Stock market indices ended the period down sharply, net.

US inflation: Expectations continued to predict a significant deceleration in inflation in the coming years. Nonetheless, the long-term inflation offset increased over the period and market participants remained alert to the risk that to bring inflation back to 2%, the Committee would have to tighten more than currently expected.

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

Participants also agreed that it was appropriate to begin reducing the size of the Federal Reserve’s balance sheet on June 1, as outlined in the plans to reduce the size of the Federal Reserve’s balance sheet.

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