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The Taper Is the Easy Part: What to Expect From the Fed’s Review

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Economy1 hour ago (Dec 15, 2021 10:26)

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© Bloomberg. Visitors ride electric scooters near the Marriner S. Eccles Federal Reserve building in Washington, D.C., U.S., on Saturday, Nov. 20, 2021. The Federal Reserve looks on course to consider a more rapid drawdown of its mammoth bond-buying program just weeks after it instituted a plan to scale the purchases back in a methodical manner.

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(Bloomberg) — The Federal Reserve’s last meeting of the year is also probably the most anticipated, and could bring a hawkish tone after Tuesday’s producer price data confirmed that inflationary pressures may feed through into next year. Here’s what the markets are expecting from policy makers on various fronts.

Taper:

This may be the easy part. With Fed Chair Jerome Powell having already flagged the possibility of wrapping up bond purchases “a few months earlier,” rates markets have taken the news in their stride. Technology stocks have thrown a bit of a tantrum, yes, but that’s pretty much irrelevant for the Fed. The market’s expectations are centered around an end to asset purchases in March, and a significant deviation here looks unlikely.

Dot plot:

The plot is likely to see a significant shift. The median for 2022 is bound to acknowledge the current market pricing for two full rate hikes. The plot for 2023 already saw three increases, and I expect it to be unchanged. A shift upward in the 2024 median — currently 1.75% — would be a hawkish takeaway, though a change in the longer-term target rate from 2.50% looks unlikely.

Summary of economic projections: 

Bloomberg Economics expects an upward revision in the headline PCE forecast for 2022 to 2.5% from 2.2%, while NatWest’s Kevin Cummins (NYSE:CMI) predicts the revision to be even higher at 2.7%. He also sees a moderation in the real GDP forecast to 3.5% from 3.8%.

Post-meeting briefing & runoff discussion: 

Powell will aim to do a careful balancing act, especially if the collective dot plot leans on the more hawkish side. He will also emphasize that we don’t know how the labor market will fare in the face of the new variant and how resilient consumer demand will be.

Among the more interesting parts of Powell’s remarks will be what the Fed intends to do with its humongous balance sheet. With St. Louis Fed President James Bullard having commented on the prospect of allowing a balance sheet runoff at the end of taper, policy makers will have likely deliberated on the issue, and the remarks will determine how the longer end of the curve reacts to the meeting.

©2021 Bloomberg L.P.

The Taper Is the Easy Part: What to Expect From the Fed’s Review

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