Forget interest rates.
Keep an eye out for references to the Federal Reserve's $4.5 trillion balance sheet in its May statement on Wednesday. Scott Clemons, chief investment strategist at Brown Brothers Harriman expects the Fed to mention the balance sheet in its commentary, as investors are starting to wonder how the central bank is going to unwind some of its assets.
"I think there has to be a reference to the balance sheet," he said, adding that it had become a new narrative at the Fed's last meeting in March, when the central bank announced another quarter point hike to short-term interest rates. "I don't think we'll see anything definitive on it [in the statement] other than: remember, there is a $4.5 trillion balance sheet out there - that's part of our toolbox."
The Fed is looking to unwind its balance sheet, as illustrated in the minutes of its March meeting. The $4.5 trillion in assets was accumulated over years of bond purchases, known as quantitative easing, a ploy to stimulate the economy following the 2008 financial crisis.
Shrinking the Fed's balance sheet could have the same impact on the markets as raising interest rates, hence investors' anxiety over the issue.
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