To The Moon

The newly released January minutes cover the most concerning subjects: rate hikes and balance sheet runoff. But financial stability warned by participants should also be noticed.

Minutes of the January FOMC meeting showed that Fed officials at their latest meeting began plans to raise interest rates and reduce the trillion-dollar balance sheet.In addition, some officials expressed concerns about financial stability at the meeting, and pointed out that current market risks come fromsurgeinasset prices and crypto assets.

Rate Hike

The FOMC committee stated at its two-day meeting in January that it would not raise rates for now, but strongly hinted at a rate hike in March. After the minutes were released at 2 p.m., stocks recovered early losses and the US 10 year Treasury yield fell. The chart below shows today's S&P 500 (black) and US 10-year Treasury yield (blue) movements.

Due to soaring inflation and hawkish comments from the St. Louis Fed President James Bullard and others, the market has had expected seven rate hikes in this year with 25 bps every time. After the release of the minutes, the market pullsback. It’s currently predicted that 175 bps increase in Fed fund rate has a 50/50 chance.

Balance Sheet Runoff

In light of the current high level of the Federal Reserve’s securities holdings, a significant reduction in the size of the balance sheet would likely be appropriate. Details on the timing and pace of balance sheet runoff would be determined at upcoming meetings, participants generally noted that current economic and financial conditions would likely warrant a faster pace of balance sheet runoff. Principles for reducing the size of the Federal Reserve’s balance sheet are set at this meeting.