FOMC Puts Taper Path Into Focus

The FOMC revealed it had started "talking about talking" about tapering asset purchases at the June 15-16 meeting, putting into play several questions on the topic of asset purchase reduction.

• Tapering will be well underway and probably over by the time the FOMC lifts off on rate hikes, so the Fed's dot plot which includes 2 2023 hikes means that as it stands, a taper timeline is set to be roughly in line with pre-June FOMC expectations (late-2021 announcement for late 2021/early 2022 start) barring downside surprises in the data.
• The balance sheet looks set to continue expanding monthly by $120-130bln (the rate of growth seen over the past 3 months) through the rest of 2021, but beyond that, the trajectory is in question.

Source: Federal Reserve, MNI

• It's no guarantee that the Fed will wait for the taper to end before hiking: our policy team reports some former Fed officials anticipate economic conditions will warrant interest rate increases as early as 2022 following a tapering decision to be delivered toward the end of this year, leaving little or no time separating the two processes.
• Another question is the composition of any taper – several FOMC members have had to fend off questions on MBS purchases, which as we highlighted in our last Balance Sheet update could be tapered prior / more quickly than the Treasury portion of the asset purchase program.