The Fed Minutes

Here are the minutes from the last Fed meeting. I want to highlight this key passage on financial markets.

Market-based estimates of the probability of a hike in the federal funds rate at the June FOMC meeting were variable during the intermeeting period. The probability of an increase in June fell to near zero in early May in response to incoming economic data, jumped to about 30 percent after the release of the April FOMC minutes and other Federal Reserve communications, and dropped again to near zero after the May employment report. The expected path of the federal funds rate for the medium term implied by market quotes declined somewhat on net. The average probability assigned by respondents to the Desk’s June Survey of Primary Dealers and Survey of Market Participants was near zero for a rate hike in June and around 20 percent for a rate increase in July. The median respondent in each survey indicated that the most likely outcome was only one hike in 2016, down from two in the April surveys.

The nominal Treasury yield curve flattened, on net, over the intermeeting period, mainly reflecting declines in longer-term rates; the flattening left the spread between yields on 2- and 10-year Treasury securities near its lowest level since 2007. Although a significant portion of the declines in yields occurred following the release of the May employment report, yields at longer maturities had begun drifting down earlier in the period, consistent with an apparent deterioration in global risk sentiment. Yields moved lower late in the period amid growing concerns about the upcoming British referendum. Some market participants attributed the decline in Treasury yields in part to heavy demand from foreign investors faced with extraordinarily low yields on foreign sovereign securities. Inflation compensation based on Treasury Inflation-Protected Securities (TIPS) decreased, particularly at longer tenors. Measures of inflation compensation based on inflation swaps also declined, but less than TIPS-based measures, consistent with anecdotal reports suggesting that a portion of the declines in TIPS-based measures might have been driven by elevated demand for longer-term nominal Treasury securities.

Broad stock price indexes moved within narrow ranges but were modestly lower, on net, over the intermeeting period. However, one-month-ahead option-implied volatility on the S&P 500 index–the VIX–rose notably from fairly low levels and ended the period close to its historical median level. Spreads of 10-year triple-B-rated corporate bond yields over those on comparable-maturity Treasury securities were little changed on balance. High-yield spreads widened, mainly for firms outside of the energy sector; spreads on bonds for firms in the energy sector narrowed, likely in response to rising oil prices.

Posted by on July 6th, 2016 at 2:59 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.