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Will Fed signal slowdown in balance sheet reduction?

The Federal Reserve will be concluding its monetary policy meeting on Wednesday. While no interest rate change is expected, the good news is that there will be a FOMC press conference to look forward to in this and every future meeting. Therefore, the attention will be on Jerome Powell’s remarks from 19:30 GMT (14:30 ET) onwards, where the Fed Chair will be scrutinised closely for clues on future policy changes. Given that the Fed has already indicated that interest rates won’t be going up again soon, investors will be keen to find out first and foremost how long is the central bank likely to remain on hold. Another focal area for investors will be comments from Mr Powell on the pace of the Fed’s balance sheet reduction. On Friday, stocks rallied while the dollar fell, after the Wall Street Journal reported that the FOMC may decide to maintain a larger portfolio of assets it currently holds, thus putting an earlier end to its wind-down. If the FOMC or Mr Powell confirms this, then the greenback could fall sharply. Meanwhile some investors are even wondering whether the Fed would consider cutting interest rates later this year, should economic conditions deteriorate again. After all, the US economy faces elevated level of risks due to a slowdown in growth in China and other emerging market economies, while domestically the impact of the tax-cut boom is fading. So, there are a few areas that market participants will be looking for more clarity on, but whether the Fed Chair provides clear answers is another matter.

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