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As Earnings Season Comes to an End, Markets Focus on Fed, Trade

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Economic policy symposium

The Federal Reserve’s annual economic policy symposium starts this Thursday in Jackson Hole, Wyoming. Fed chair Jerome Powell is scheduled to speak on Friday. Investors are understandably eager to hear his speech titled “Monetary Policy in a Changing Economy.”

Investors will be looking closely for any comments about the US economy (IVV), employment, and inflation (TIP), the most important considerations in order for the Fed to decide on the pace and frequency of interest rate hikes.

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Highly watched

The Fed doesn’t usually give clues about monetary policy and the interest rate (TLT) outlook at the annual symposium. But the speeches are closely scrutinized and have the potential to move the markets. The meeting is even more important for the markets now that the earnings season is almost over. According to FactSet, by August 13, 91% of the S&P 500 (SPY) companies had reported their earnings.

End to balance sheet reduction?

One thing the market is anticipating Powell to touch on at the symposium is the extent of the balance sheet reduction and a possible early end to it. The Fed started shrinking the size of the balance sheet, which was $4.5 trillion, in October 2017. Now, many analysts, including those from Morgan Stanley (MS) and Credit Suisse (CS), have started to believe that the Fed will end its balance sheet reduction sooner than expected. Some even expect it to happen by the end of the year. If that happens, it will be taken as a dovish sign from the Fed, which could lead to weakness in the US dollar (UUP) while other currencies rally.

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