The S&P 500 is near all-time highs following the release of the Federal Reserve's May policy meeting minutes. Stocks have largely been trading around the flat-line all day in anticipation of the release and have gotten what looks to be a slight bump of confidence after digging deeper into the Fed's commentary. You can read our initial review of the Fed's statement following the May policy meeting here.

Perhaps stalling any push higher, investors are watching key technical levels (S&P 500 is near all-time closing highs and all-time intra-day highs) as well as a decline in oil prices ahead of the OPEC meeting in Vienna tomorrow. Although oil prices initially traded higher after the Energy Information Administration's inventory report earlier this morning, traders quickly shifted to a cautious approach, taking profits and focusing more so on the bearish gasoline figures as opposed to the larger-than-expected draw in crude (see our bulletin from earlier detailing the inventory report here.)

As for the meeting minutes, you can review our note from yesterday explaining why investors would be focusing on the Fed's observations. In line with expectations, the minutes confirmed that the Fed continues to expect to raise interest rates gradually over time, with eyes on June for the next potential hike. The consistent commentary is essential as investors have begun to question the true potential for two additional rate hikes this year, with weaker data and internal struggles in the White House both raising doubts regarding the economic outlook. Following the release of the minutes, the probability for a June rate hike remained above 80%, according to CME Group.

According to the minutes, "Most participants judged that if economic information came in about in line with their expectations, it would soon be appropriate for the committee to take another step in removing policy accommodation." Overall, officials agreed that the economic outlook had changed little since the March meeting (see here). In a more timely comment, Philadelphia Federal Reserve President Patrick Harker confirmed yesterday that he believe it remains appropriate to raise interest rates two more times this year.

Policy members viewed the weaker first-quarter economic results as "transitory" rather than an issue that would cause any broader concern. Recall that the Fed's preferred inflation gauge, the price index for personal-consumption expenditures (PCE index), briefly extended beyond the Fed's annual 2% target, on a year-over-year basis, in February, but disappointed with a greater-than-expected drop in March, showing annual prices were only up 1.8%. The trend in the consumer price index (CPI) showed similar declines in April.

Fed officials have also remained steadfast in their decision to wait for fiscal policy, noting that "many participants continued to view the possibility of expansionary fiscal policy changes in the United States as posing upside risks to their forecasts for U.S. economic growth, although they also noted that prospects for enactment of a more expansionary fiscal program, as well as its size, composition, and timing, remained highly uncertain."

While we did not receive any new information regarding the outlook for rates moving forward (as expected), the minutes did provide a peak into the Fed's plans for reducing its balance sheet (we referred to this discussion in our review of the March meeting minutes and again in our analysis of the May statement, both linked above). The May statement did not offer any significant language pertaining to the plan, but the minutes appeared to indicate that officials were moving toward a consensus on how to shrink the $4.5 trillion balance sheet (which contains bonds and other assets).

For now, the committee intends to begin, prior to the end of the year, gradually ending its practice of reinvesting proceeds from its maturing portfolio securities. To do this, the FOMC will announce a set of gradually increasing limits on the dollar amounts of securities that would be allowed to "runoff" (i.e., mature without reinvestment) each month until the balance sheet approached "some level of normal." Although the central bank stopped buying additional assets more than three years ago, the practice of reinvesting proceeds has kept the balance sheet at a steady level.

By decreasing the balance sheet, the Fed could have a "double" impact on interest rates (along with rate benchmark rate increases) -- reinvestments have kept demand high in the market for government bonds, holding rates low, while changing the reinvestment policy could impact the supply/demand dynamic and force upward pressure on rates. There is currently no real consensus on how this will play out in real time. As such, the Fed intends to be as passive, predictable, and boring as possible when enacting this plan in an attempt to maintain order in markets. The minutes appear to support this plan.

We will have to continue to follow the commentary for more details moving forward. In the immediate term, all eyes will remain on June's policy meeting for the decision on whether to increase benchmark interest rates.