On May 18, 2016, the Fed (Federal Reserve) released the minutes from 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 markets 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 minutes also tried to correct investors’ misconceptions by spelling out developments that could warrant an increase as early as June, since the markets were underestimating the possibility of an early rate hike.
The Fed left interest rates unchanged between 0.25% and 0.50% in April’s meeting. Rates have remained in that range since December 2015, when the Fed raised interest rates for the first time in nearly a decade.
Following the release of the minutes, investment-grade bond (FMEQX) (CSJ) (BND) yields jumped 10 basis points from the previous day and ended at 3.18% on May 18, 2016. Meanwhile, banking stocks such as Citigroup (C), Wells Fargo & Company (WFC), and Bank of America (BAC) also rallied on the hawkish tone of the minutes.
Hawkish Fed officials
Dallas Fed President Robert Kaplan said, “The US economy is strong enough to justify an interest-rate hike in the ‘not too distant future,’ but increases will be very gradual.” San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart both believe the Fed’s June meeting will be a live one.
However, some policymakers noted that global financial markets could be sensitive to the upcoming British referendum on European Union membership or unanticipated developments due to China’s intention on interest rates.
In the next article, we’ll see how yields and spreads have fared so far in 2016.