Wrightson ICAP: Taper Impact In Late 2021

Wrightson ICAP sees FOMC members having painted "a fairly clear picture of the Fed's balance sheet views" last month. The qualitative QE guidance does not rule out possibility of taper this year, but "in practice", comments from Powell and Clarida "should reinforce the market's belief that tapering is unlikely before 2022."

• The median Dec SEP estimates might be enough to meet the "substantial further progress" hurdle to tapering, but Powell emphasized that the Fed does not intend to tighten prematurely.
• Communications about balance sheet and front-end rates "are closely related", as when the Fed begins to taper, it will already be looking ahead to managing lift-off expectations. So "the best way to persuade the market that the FOMC won't be trigger-happy about raising interest rates down the road is to be conspicuously patient about launching its QE winddown".
• That said, "the FOMC seems comfortable with the view that the next change in its QE program will be hawkish rather than dovish."
• Future action: Recent comms suggest no taper through end-2021, but the impact of the taper "still seems likely to show up in the latter part of this year" via announcement/ anticipation effects. Fed likely to "start actively telegraphing" a 2022 taper by 4Q 2021 "at the latest", with markets pricing it in even earlier.