Minutes from the Federal Reserve’s April 30-May 1 meeting showed officials at the U.S. central bank inclined toward patience and to keeping the current wait-and-see policy in place “for some time.” Adding to the dovish tone of the minutes, many Fed members agreed with Fed chair Jerome Powell’s view that the recent dip in inflation was likely temporary. “Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some time,” the minutes said.
Of course, that makes defining “for some time” the crux of the market’s attitude toward interest rates. In the wake of the release of the minutes, Wall Street seems inclined to see “for some time” stretching at least to September. It would be unlikely, the thinking on the Street goes right now, for the Fed to cut interest rates while it is still reducing the size of its balance sheet by $15 billion a month as it lets some assets mature without replacing them. Having both policies in place at the same time would be equivalent to running a looser money policy (the interest rate cuts) at the same time as running a tighter money policy (the balance sheet reductions.) The Fed seems to be pointing right now at September as a possible time for ending the balance sheet run off. Which would put a rate cut sometime after that month.
Financial markets weren’t surprised by the tone of the Fed’s minutes. The Standard & Poor’s 500 index ended the day off 0.28% and the Dow Jones Industrial Average was lower by 0.39%. The NASDAQ Composite fell 0.45% and the small cap, small-bank-heavy Russell 2000 index was off 0.88%.
Both the Financial Select Sector SPDR ETF (XLF) and the Technology Select Sector SPDR ETF (XLK) were down today by 0.59% and 0.52%, respectively. At its close of $27.03 the Financial SPDR ETF remained above the $26.50 level that has been a pivot for financial stocks in 2019.