Next week the FOMC will announce the start of tapering its $120 billion-per-month asset purchase program. Expectations are that it will announce a reduction in purchases of $15 billion per month, which would mean that it ends all purchases by June 2022 (assuming the reduction starts in November). Given the amount of forward guidance that has taken place, the Fed believes this policy change is fully priced into the market and that the process should, as Janet Yellen once stated, “be like watching paint dry.”
Meanwhile, according to pricing in the fed funds futures market, not only have investors already long since moved on from the taper, they are now more aggressively pricing in two rate increases in 2022, compared to just one expected increase only a few weeks ago. This is considerably more hawkish than the Fed, which still seems to expect no changes in rates next year.
In this Economics Weekly, we look at market expectations, what they are telling us, and what the Fed is likely to make of these as it heads into next week’s shindig.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.