The Federal Reserve released the minutes from their most recent meeting this week. In it was an answer to a question that has lingered over the market for some time – what to do with the $4.5 trillion of securities residing on their balance sheet after years of expansive monetary policy. Maintaining focus on a measured pace of unwinding stimulus, the approach emphasizes control over how quickly the balance sheet will shrink. Essentially, the Federal Reserve will place a cap on the amount of securities that will be removed each month. Any market-driven increase of that pace (for example by pre-payments on the mortgage bonds owned) will be re-invested to keep the cap intact. US Treasury yields fluctuated only a few basis points in either direction after this new information demonstrating that the market feels comfortable with the approach. So far, the Federal Reserve has continued to navigate the removal of their extraordinary support with only modest bouts of anxiety though there is still a long road to travel.
The Organization of Petroleum Exporting Countries (OPEC) are also watching the clock as they released the minutes from their Vienna meeting this week. It resulted with the production cuts put in place at the last meeting being extended for another 9 months. Whether the market expected a longer time frame or deeper cuts is unknown, but the oil price fell on the news from near $51/barrel (WTI) to near $49/barrel. With the uncertainty removed for a period of what OPEC would do, speculators looking to short the market now feel more comfortable re-establishing positions which also adds pressure to the price. Oil production in the US continues to rise, particularly in the Permian Basin where reports estimate current production at around 2.3mm/barrels per day and set to expand significantly in the future. OPEC’s decision to unhinge the oil price back in November 2014 by producing without restraint to push down prices (which it did) and squeeze out American shale producers (which it did not) looks to have backfired. Perhaps they are wishing they could turn back the clock.