The 3 big changes the Fed will make that investors need to watch

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There are are a whole bunch of buzzwords markets are also watching for clues on policy.

For one, the Fed’s balance sheet is the 800-pound gorilla that the Fed has not yet addressed, but that President Trump tweeted about Wednesday. Powell could discuss it, and some strategists say it would take on much bigger importance if the Fed adds something about it to it statement.

Market pros have been looking for information on when the Fed could stop or slow whittling away at its balance sheet, which it has done by lowering reinvestments.. Powell has said the Fed would study the impact of cutting back to purchases of securities to replace those that are maturing on its balance sheet.

Besides the fed funds target rate, the Fed will likely raise the rate on interest on excess reserves by 20 basis points. It’s a technical move to keep the fed funds rate within its target range.

Strategists said they are also keeping an eye out for language tweaks that could include how the Fed sees risks to the forecast and whether they remain balanced.

The Fed could also discuss changing financial conditions, which have tightened and in part include the stock market’s volatile behavior. Comments on financial stability could also be important, as would an update from Powell on how the Fed views conditions in the credit market and with leveraged loans.

In comments at his press briefiing, which begins at 2:30 p.m. ET, Powell could talk about the implications of trade wars and the potential impact on the economy.

Powell could also make more comments about how close the Fed is to neutral, following his famous October statement that neutral was far away and his seeming reversal of that comment in November, when he assured the Fed was close to neutral.

“If the committee is signaling we’re getting close to the peak of rates this cycle, that’s a different state of the world than where we were for 2017 and 2018 with this methodical, gradual rate increases,” said Hill, adding markets would have to further adjust.

2018-12-19 16:47:00

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