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Fed Telegraphs That Bond Tapering Will Come Soon – Three Experts React

Brendan McDermid | Reuters

The Federal Reserve left rates unchanged again on Wednesday but said a taper "may soon be warranted" if the economy continues to progress.

Three experts discuss the decision.

Liz Young, head of investment strategy at SoFi, predicts the Fed's taper will be slow and steady.

"The evolution is happening, but it's happening very, very slowly ... Even if they taper at the speed that we're expecting, they're still buying a lot of bonds through the first half of 2022, so it's not as if suddenly the liquidity is going to leave the system or leave the picture. There's still a lot of liquidity that they're putting in. As for the market action, I think before we got the announcement, it was interesting to see that the 10-year yield had fallen and equities were up strongly. So at broad brush, you could assume that the market was expecting a dovish statement, but if you pulled back the cover a little bit and looked at what sectors were actually driving, it was cyclicals, it was materials, it was energy, it was financials, industrials. So what that would suggest is that the market is actually ready for a little bit of a liftoff in the 10-year and a rise in rates, and I think that is what we're going to see in a gradual way."

David Kelly, chief global strategist at JPMorgan Asset Management, lays out his timeline for the Fed.

"I think it was interesting that they basically signaled they're still on track to taper by adding that phrase about reducing asset purchases may be warranted. I think that's an echo of what Chairman [Jerome] Powell has said a number of times before about how they'll give us plenty of notice. So that is the first official warning that tapering is coming. I think it's coming in December. I think they'll announce a schedule in November, and they'll start cutting purchases in December."

John Bellows, portfolio manager at Western Asset, sees a slowing in economic growth as one hurdle to the Fed's taper plans.

"We've seen a material downgrade in U.S. growth. Obviously, there's a global growth concern emanating from China. It's not just financial stability concerns, but instead there's kind of a broader growth slowdown going on there as well. And, that's a big deal for the Fed because a big part of their outlook into 2022 and beyond is kind of robust global growth, and so if you are in a period of slower global growth, I think that has implications for your rate hikes."

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