At the FOMC meeting held on April 29–30 in Washington, DC, participants noted that investors had well understood the changes to the Committee’s forward guidance at the March FOMC meeting.
However, some emphasized that the committee’s policy intentions should be communicated more clearly, especially as the time of the first increase in the Federal funds rate moves closer. Though changes in the Fed funds rate directly affects the performance of ETFs tracking short-term Treasury securities like the iShares Barclays 1–3 Year Treasury Bond Fund (SHY), the change cascades along the Treasury yield curve, and eventually affects longer-term Treasury tracking ETFs like the iShares Barclays 20 Year Treasury Bond Fund (TLT) even more, on account of their higher duration. However, with interest rates being low for a while and the market expecting a rise, investors sometimes prefer ETFs that are designed to play rising interest rates, such as the SPDR Barclays Capital Investment Grade Floating Rate ETF (FLRN), which tracks the floating-rate debt of companies like Goldman Sachs (GS) and JP Morgan Chase & Co. (JPM).
Some FOMC members also suggested that the FOMC should also provide additional information regarding how long it would continue its policy of rolling over maturing Treasury securities at auction and re-investing principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities.
Based on the information received for the intermeeting period, members concluded that economic activity had picked up. The labor market, unemployment rate, and housing spending all indicate improvement. Though the fiscal policy and budgetary constraints may have been restricting growth, the extent of this restraint is diminishing, with the Fed tapering its asset purchase program by $10 billion at each FOMC meeting.
Accordingly, at the April 29–30 FOMC meeting, the committee agreed that, starting in May, it would add to its holdings of agency mortgage-backed securities at a pace of $20 billion per month rather than $25 billion per month and would add to its holdings of longer-term Treasury securities at a pace of $25 billion per month rather than $30 billion per month. The total in asset purchases now stands at $45 billion a month—down from its initial level of $85 billion a month, back in September 2012.
The discussion concluded with committee members voting to authorize and direct the Federal Reserve Bank of New York to execute transactions as per the revised policy directive. The vote encompassed approval of the statement to be released to the public. All members voted for the action.
The FOMC agreed to meet next on June 17–18, 2014, to review the economic and financial situation of the country and direct the course of the economy with the help of its monetary policy tools.
To learn more about how the April FOMC minutes can affect your portfolio, see the Market Realist series April 2014 FOMC minutes: Why focus on normalization?