Analysis: The combination of Federal Reserve interest rate cuts and balance sheet cuts may boost market risk appetite

The Fed's policy committee is likely to take two decisive dovish steps simultaneously on Wednesday: a 25-basis point rate cut and signal further easing, while announcing the end of the balance sheet reduction program (a move that could put downward pressure on Treasury yields). "The combination of a rate cut (combined with expectations of further easing) and an early halt to balance sheet reduction will provide significant support to market risk appetite," said Derek Tang, analyst at LHMeyer, a Fed watcher. He added that while there was uncertainty about whether to end balance sheet reduction this week, the recent tightening in funding markets made this decision significantly more likely.