Key takeaways from the minutes of Fed's May policy meeting

Fed funds futures now price in about a 75% chance of the rate increase in its June policy meeting

The US Federal reserve, in its minutes of the May 2-3 policy meeting indicated the likelihood of a June rate increase, but expressed some doubts over the trajectory of future rates hikes, thereafter. The Fed also mentioned to start reducing its balance sheet this year as long as the recovery in US economy continues as expected. 

The Federal Open Market Committee had voted to keep rates steady in its May policy meeting after increased it by 25 basis points to a range of 0.75% to 1% in March. 

Fed funds rate futures are now pricing in about a 75% chance of the rate increase in its next policy meeting on June 13-14, moving down from more than 80% earlier this week, reported Reuters. 

Below are key takeaways from the minutes of the meeting:

On future rate hikes

Although the Fed officials stayed committed to follow the rate hike path they laid out for 2017, they also indicated their heightened caution over policy tightening.

"Members generally judged that it would be prudent to await additional evidence indicating that a recent slowdown in the pace of economic activity had been transitory before taking another step in removing accommodation," according to the minutes of the meeting. 

On balance sheet

Nearly all policymakers favoured to start the unwinding of the central bank's massive holdings of Treasury debt and mortgage-backed securities this year. 

“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.

The Fed has more than $4 trillion in treasury debt and mortgage-backed securities, largely accumulated as part of the effort to stimulate the economy in the wake of the 2007-2009 recession.

Under the plan, a limit would be set on the amount of securities allowed to fall off the balance sheet every month. Initially, the cap would be set at a low level, but every three months the Fed would allow deeper cuts.

Economic projections 

The Fed noted that the near-term risks to the economic outlook appear roughly balanced, and that the stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2% inflation.

“With respect to the economic outlook and its implications for monetary policy, members agreed that the slowing in growth during the first quarter was likely to be transitory and continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, labor market conditions would strengthen somewhat further, and inflation would stabilize around 2% over the medium term, the minutes showed.