EUR 46.36 For Business Accounts Only

What Markets Are Overlooking About the Fed

​Markets are quite obsessed with the Fed’s evolving reaction function and their “desire” for future rate hikes. While this is a useful discussion, MIG feels it misses three critical issues:

• 1.The Fed’s economic outlook is not overly optimistic this year - take their rate forecast seriously​

• 2.Markets are overlooking the Fed’s “stealth” tightening tool – balance sheet reduction

• 3.While rate hikes have impacted the belly of the curve mostly, paring back the Fed’s holdings of bonds will significantly boost long-term rates - even before they begin taking action

Balance sheet reduction is a major tool for the Fed and constitutes the next phase of monetary tightening. So far the FOMC has provided little guidance around it. MIG expects this will be a more prominent topic at coming FOMC meetings, and for the Committee to reach to a consensus and issue guidelines before the end of the year.