The Fed Is Wary Of The Bond Market

The markets are trading quietly as the Fed takes a wait-and-see approach on raising interest rates.

The minutes from the April Federal Open Market Committee (FOMC) meeting failed to cause a reaction in the markets yesterday and that’s a good thing. The minutes contained nothing new. The FOMC is in a wait-and-see mode for tightening. It will certainly wait through June. After that, we’ll see. The minutes did include an interesting discussion by Fed officials regarding concerns about a rate spike in the bond market when the Fed does first tighten rates.

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The Fed cited illiquid bond markets, massive bond positions by investment managers, and high-frequency trading as risks to the bond market. Officials have even asked Fed staff members for more frequent updates on the state of the markets. I am hopeful this discussion was a statement by the Fed to the markets that members know there will be strong reactions; however, this will not deter them from doing what they think is needed. This is my hope now, which beats thinking the Fed will back away at the first sign of another tantrum.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

May 21, 2015

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