Tapering marks the beginning of a tightening cycle
|Key takeaways
- In line with our base case, the Fed announced it will reduce the monthly QE buying pace by USD15bn per month starting from mid-November. This means that QE is concluded in June.
- As expected, the Fed introduced some flexibility by saying the tapering pace could be adjusted if needed. We think balance of risk is tilted towards a higher tapering pace, although it is not our base case.
- Fed Chair Powell linked future rate hikes to labour market outcomes, unless the Fed fundamentally changes its view on high inflation being transitory.
- We believe tonight's announcement marks the beginning of a tightening cycle still expecting two rate hikes next year (25bp both in September and December 2022).
- FX: We continue to forecast EUR/USD to 1.10 in 12M (with downside risks).
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