Fed Quick Analysis: Three hawkish taper twists set to lift dollar

The Federal Reserve announced tapering worth $15 billion/month, but beginning already in November.
Flexibility in the tapering program allows increasing the pace later on.
Comments on inflation are less confident.

The devil is in the details – while the Fed has been preparing markets for its tapering decision for months, there are still three hawkish twists that could push the dollar higher.

First, the process begins already this month, contrary to expectations of kicking it off in December, when markets are quieter. Kicking it off early means being able to end it earlier on and raise interest rates sooner rather than later.

Secondly, and more importantly, the Fed has laid out its path for cutting bond-buying in the next two months. What happens next? While central banks and especially the Fed prefer being predictable, there is room for flexibility. They are explicitly ready to adjust the pace.

Third, the comment on inflation is less certain, showing some worries that prices rises could remain elevated: "Inflation is elevated, largely reflecting factors that are expected to be transitory" (emphasis added). Beforehand, it was "largely reflecting transitory factors." Only a nuance? Not exactly, markets are watching every word and every subtle change.

Overall, the Fed delivered a $15 billion/month tapering as expected but these three details are pointing to an earlier "lift-off" – rate hikes – and that is the bottom line for markets.

For the dollar, it means the knee-jerk reaction to the downside is likely the wrong one. While a lot depends on the words of Fed Chair Jerome Powell and on analysts' interpretations, the initial take is dollar-positive.

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