Not only is there a good chance the U.S will raise its official rate next month for the second time this year, there now seems to be a hardening of the view the beginning of the end of bond purchases by the U.S Fed is not far away.
According to the Federal Open Market Committee (FOMC) minutes of May’s meeting “Policymakers agreed that the Committee’s Policy Normalization Principles and Plans should be augmented soon to provide additional details about the operational plan to reduce the Federal Reserve’s securities holdings over time.” In other words, the FOMC will state its plan and timetable for reducing its bond purchases soon.
ANZ’s Martin Whetton said the use of the word “soon” indicated June this year. However, he thought the Fed had given themselves an out in the minutes. He said the minutes stated “ ‘it would be prudent’ to wait for evidence that a recent slowdown in economic activity had been transitory. The Fed also said it would look for a gradual, predictable way to unwind its balance sheet…”
Westpac’s Imre Speizer thought “soon” was not quite that soon and it had to be in the context of further rate rises. “A June hike still seems to be on the table, but the outlook beyond is slightly more uncertain given the potential for balance sheet shrinkage to start in late 2017.”
Bond yields fell on the day. The yield on U.S. 2 year bonds finished down 2bps at 1.28% while 10 year bonds fell 3bps to 2.25%.