Tapering marks the beginning of a tightening cycle

Danske Research Team Danske Bank A/S

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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Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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