In its statement, the Fed explained that "Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities." The FOMC statement presents an otherwise optimistic economic outlook, which is at odds with this message.
The Fed is not as concerned about a market correction as it is about maintaining some calm in the bond market amidst an unsustainable increase in government deficit and public debt.
The Federal Reserve is reluctant to admit two things: the Treasury's debt supply is significantly higher than private sector demand, and the Fed is more concerned about a bond market meltdown than elevated inflation.
A bond market meltdown would be exceedingly dangerous for the Federal Reserve because it would arrive at a moment when the US and European bond indices have not recovered from the 2022 slump.
If the two-year bond yield rises above 5% and the 10-year yield soars, we could see a dramatic correction in a market that continues to build elevated risks under the expectation that the Fed will bail everyone out.
A bond market slump would bring down the entire deck of cards in a complacent market.
The decision of the Fed comes when the global demand for Treasuries is under question.
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