Fed Reveals Key Element of “Normalization”

Today’s Fed minutes were all about the guidance regarding the unwinding of the balance sheet and the markets liked what they learned.   Fed Chair Yellen has learned the lessons stemming from market volatility during the 2013 “Taper Tantrum” when former Fed Chair Bernanke outlined the slowing down of quantitative easing (QE) without preparing markets.  For the unwinding (letting the securities purchased during QE roll off of the balance sheet as they mature), Yellen indicated that there will be monthly cap limits on how much it will allow to “roll off” each month.   Both stock and bond markets rallied on this news as they feared a Fed on “autopilot” would potentially disrupt treasury markets by releasing too much supply into the marketplace and cause disruptive rate spikes.    The 10 year T is at 2.25%, it rallied on the “measured approach” news.   The 2 year  T remains high based on the now “certain” expectation of a June rate hike.   The yield curve is the flattest its been in a while. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.