What to watch

A study guide for Fed’s meeting minutes

Investors wondering what the Federal Reserve’s next move is on interest rates and its massive bond portfolio will comb the minutes of its May 2-3 meeting on Wednesday for clues.

Investors, according to bets placed in future markets, are betting the Fed will boost its key interest rate another quarter point at its next meeting in mid-June. There’s an 83% chance the Fed will lift its short-term rate, currently in a range of 0.75% to 1%.

But it’s not just the pace and timing of rate hikes Wall Street is wondering about. The Fed has said that it’s working up plans to start paring back its $4 trillionplus holdings of mortgage-backed bonds and longer-term U.S. government bonds. And Wall Street will be looking to the meeting’s minutes for any hints as to “when and how the Fed plans on shrinking ” its holdings, says Stephen Wood, chief market strategist at Russell Investments.

Despite all the political news moving markets lately, Wood says the Fed is “still the primary story for the market, even though they are not in the news every day.”

The combination of rates moving higher and the Fed eventually selling the bonds it owns could be disruptive or a non-event for markets, depending on how the Fed executes and communicates its plans. “The Fed is gradually preparing the market for that change,” says Wood, noting that bond sales impact the market more directly because it increases the supply for sale, which “can affect prices and interest rates.”