What's going on?

According to the minutes of the US Federal Reserve�s (�the Fed�) latest meeting, the central bank is preparing to push up interest rates in a new way�

What does this mean?

During the financial crisis, the Fed began to directly buy bonds. By doing so, it pushed down interest rates (Why? Click here) � which supported the economy by making it cheaper for people to borrow, and thus spend, money.


But now the economy is much healthier. The Fed has already increased its target interest rate a few times, but it would now like to reduce the amount of bonds it owns. Currently, each time a bond expires (find out how bonds work here), the Fed buys a new bond. But now it�s considering buying fewer new bonds in the future, thus reducing the total amount of bonds it owns.

Why should I care?

For markets: When and how this happens is important to stocks and bonds.

Investors are now primed to expect this to occur at some point this year. All else being equal, the sooner it starts and the greater the amount of bonds that the Fed stops buying, the more upward pressure on interest rates there is likely to be. When a big buyer like the Fed buys fewer bonds, it is clearly bad for bond prices. Also, rising interest rates can create challenges for stocks (click here for more background).


The bigger picture: Interest rates are going up, but in some ways life has become easier for companies.

While the Fed�s target interest rate has increased three times in the past seven months, financial conditions for companies in the US have still eased in recent months. For one, borrowing costs remain exceptionally low, despite the Fed�s actions. Also, the US dollar has sold off by about 6% versus other major currencies this year, making it easier to sell goods abroad and run overseas operations more profitably.