Bank of America on FOMC: Hawkish Interpretation

Bank of America on Wed's FOMC: Hawkish interpretation is "driven by the Fed's dot plot and taper communications. The Fed's dot plot signaled a pace of hikes that is in line with the market for end '22, 10bps above the market for end '23, and roughly 60bps above the market for end '24."

• "Chair Powell suggested the taper thresholds are "all but met" and should conclude towards the middle of next year. The taper communications reinforce our view for a formal taper announcement at the November FOMC meeting & first reduction in the pace of purchases in the November to December purchase calendar. The guidance to complete taper towards the middle of '22 suggests the Fed may consider a monthly pace of reductions instead of our base case per meeting reduction (Fed reductions per month = taper end in May - Jun '22, Fed reduction per meeting = taper end in Aug - Sep '22).
• On balance the more hawkish Fed is a key ingredient for our higher rates view into year-end. Fed communication also suggests a clearer bias for 5s30s curve flattening in coming months. The announcement of taper at the Nov FOMC should have a limited impact on spreads given the US Treasury is likely to announce coupon cuts on the same day. We continue to favor wider swap spreads across the curve in the months ahead due to these UST coupon cuts and ongoing steps to improve UST market structure. Note: a risk to the swap spread widening view is a less favorable regulatory environment depending on the Vice Chair of Supervision nomination."