On May 18, 2016, the Fed released the minutes of the April FOMC (Federal Open Market Committee) meeting. The language of the minutes was more hawkish than expected. According to the minutes, “Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen and inflation making progress toward the committee’s 2 percent objective, then it likely would be appropriate for the committee to increase the target range for the federal funds rate in June.”
The Fed left interest rates unchanged at 0.25%–0.50% in April’s meeting. Rates have been in that range since December 2015 when the Fed raised the rates for the first time in nearly a decade.
The ten-year bond yield rose from 1.8% before the release to 1.9% after. The two-year yield also spiked, rising from 84 basis points to 91 basis points. After the release of the minutes, banking stocks for Citigroup (C), Wells Fargo (WFC), and Bank of America (BAC) rallied. Long-term funds such as the iShares 20+ Year Treasury Bond ETF (TLT) and the T. Rowe Price US Treasury Long-Term (PRULX) fell 1.6% each for the week ended May 20, 2016.
Hawkish Fed officials
Robert S. Kaplan, president and chief executive officer of the Federal Reserve Bank of Dallas, said, “The U.S. economy is strong enough to justify an interest-rate hike in the ‘not too distant future,’ but increases will be very gradual.”
Some policymakers did note that global financial markets could be sensitive to the upcoming British referendum on its European Union membership and unanticipated developments due to China’s intention on interest rates.
In the next part, we’ll have a look at various Treasury auctions that took place last week.