Focus Shifts to Balance Sheet Ahead of Fed Minutes

The biggest news expected today is from the Federal Reserve.
The bank will release the minutes of the February meeting during the US trading
session. This will be an important release that may lead to significant moves
in the markets.

In the previous meeting, the bank said that it was moving
from an increasing hawkish position to more dovish. Instead of more rate hikes
this year, the officials said that they will be patient. They argued that while
the US economy has shown some resilience, external factors like a slowdown in
the Chinese and global economy raised serious concerns. As a result, investors
are now pricing-in one or zero rate hike this year. This may be the year with
the least rate hikes after the Fed started tightening.

Another important thing that traders will look at is the
balance sheet statement. After the financial crisis, the bank moved to increase
its balance sheet. The goal was to make the financial system more
accommodative, with the goal of providing more growth. Since then, the balance sheet
has grown from under $1 trillion to more than $4 trillion. This happened during
the era of quantitative easing. This balance sheet is made up of bonds that the
central bank bought. The concern among the market participants is that the
shrinking of the balance sheet is happening at the same time as the Fed is
tightening. As such, the obvious question is this: ‘if the Fed’s easing was a
good thing for the market, why should tightening not be bad?’

In recent months, the Federal Reserve has struggled on how
to communicate with the market. In October, the Fed chair said that the Federal
Reserve was a ‘long way’ from the neutral rate. In December, he said that the
balance sheet operation was on autopilot. In December, he spooked the market by
his hawkish tone, which led to a sharp decrease in the stock market.

This year, he has started to correct his mistakes. In the
January meeting and in other speeches, the governor said that the Fed will be
careful about the pace of rate hikes. Other Fed officials too have talked about
the need for moving on slowly with the rate hikes.

The minutes will be released at a time when economic data
from the US shows that the economy is still healthy. In the past two months,
the economy has added more than 600K jobs. The PMIs are doing well and just
yesterday, Walmart released better-than-expected results. The results by
Walmart are a good representation of the health of the consumer. The housing
numbers too have been good. At the same time, the US is engaging with talks
with China, which could go on well. The stock market has also recovered, with
the main indices growing by double digits this year. The dollar too has
remained being resilient as shown below.

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