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.