Key takeaways

  • The Fed recognises it is in a difficult position with subdued employment and high inflation. The Fed was overall more hawkish than markets and we had anticipated.
  • The Fed says labour demand is high and that the labour market is tight by many measures (despite subdued total employment). Fed thinks "inflation is elevated". Only dovish comment was that delta is slowing the recovery. Fed Chair Jerome Powell is not concerned about the impact on the US economy of Evergrande at the moment.
  • The Fed says tapering "may soon be warranted" and that it expects tapering to be concluded in mid-2022. The 'dot plot' was raised signalling a total of 6.5 rate hikes by year-end 2024.
  • We expect the Fed to announce tapering at the next meeting in November and that the tapering pace will be approximately USD20bn per month, implying that tapering is concluded by mid-2022. We still expect the first rate hike in H2 2022, either in September or December.
  • Fixed Income: The 2s10s US curve flattened because of Powell's hawkish message. The reaction in the US Treasury market was overall modest, however.
  • FX: Also modest movements in FX space although EUR/USD broke below 1.17. Both EUR/NOK and EUR/SEK are trading around the levels before the announcement.

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