If the Fed actually does shrink its book by $3 trillion over 2 years the market will respond. That is a Macro risk that we all need to be aware of. They don’t necessarily have to raise interest rates (e.g. the fed funds rate) to do this, just quietly omit buying new bonds as old ones run off
Now what will the Fed ACTUALLY do and why, over the next 24 months?
To expand on choice (3): The Fed will not tighten/taper as Powell has no wish or guts to be he party pooper/ upset TPTB. Government has already large debt and even larger (over)spending plans which are helped by a little financial repression, and a motivated bond buyer - savers and retirees be damned. Nobel prize winner supports this thinking, so why worry - better than being attacked for „strangling the economy during a pandemic“?
So much to this cynical option. Your view?
- Fed will get serious and taper/ tighten to combat inflation
- Fed will not tighten meaningfully, convinced inflation is temporary
- Fed will not tighten meaningfully due to lack of balls
- My pants feel rather tight