Wall Street will be focused on Federal Reserve Chair Jerome Powell's speech in Jackson Hole, Wyoming on Friday, August 24th.
It's unlikely that Chair Powell will say anything to deter a September short-term interest rate hike, which, according to Bloomberg, the markets are viewing as almost a near certainty. However, there may be clues about how quickly the Federal Reserve will raise rates in late-2018 and throughout 2019.
Wall Street will also be looking for any hints on what the Federal Reserve's plans are for its ‘balance sheet.’ During the financial crisis, the Federal Reserve bought trillions of dollars of bonds to keep interest rates low and encourage bank lending. As a result, its balance sheet ballooned from about $900 billion to $4.5 trillion.
As the economy healed and no longer needed this amount emergency support, the Federal Reserve began to reduce the size of its balance sheet in late-2017. The balance sheet is now at $4.2 trillion, and while it's unknown how small it may become, some economists expect it to end up around $2-3 trillion.
The economic calendar is very light this week, but there will be fresh data on housing (existing and new home sales) and manufacturing (durable goods).
The big news last week was that the U.S. and China agreed to resume trade talks. The goal of these lower-level talks is likely to open the door so high-level officials can begin again to have real discussions.
At Simply Money Advisors, we believe a deal between the world's two richest nations will eventually be reached, but it may take a few more months.
The Simply Money Point
U.S. economic data continues to be mostly positive and corporate profits are still growing, which should keep the Federal Reserve on its current path of increasing interest rates. With recession risk low, stocks should continue to edge higher.
However, bouts of turbulence are still likely because of some current ‘unknowns:’ how talks with China will play out, and anxiety from some on Wall Street that the Federal Reserve may end up raising short-term interest rates too quickly.
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