🗝UBS: Powell To Stress Difference Between Tapering and Rates

• The one commonality among all the Jackson Hole previews is that Fed Chair Powell will once again emphasise the difference between a taper decision and a rates decision. Unless he is exceptionally (and hence surprisingly) hawkish and the whole taper framework is brought dramatically forward, then rate pricing looks out. The market has the first hike priced for early 2023.

• Relative to likely taper timelines, that's much too early. At $120 bn/month of QE, then at a reduction of $15 bn per meeting, it takes all eight 2022 FOMC meetings to get to steady state balance sheet. In the last cycle terminal balance sheet was achieved in October 2014. The first hike was 14 months later in December 2015, though liftoff was aborted and retried a year later.

• As current markets and expectations stand, the Fed will hit terminal balance sheet and then immediately raise rates. It then hikes twice a year consistently up to 2%. The Eurodollar strip is concave in nature, yet the more likely scenario is for lower/longer/steeper/later to give a more convex appearance. Though Powell will be right to say the reaction function between taper and rates is different, the timing of the two policies are very closely linked. On current guidance, the Fed's hawks (the '22 hikers) and the market pricing can't be right.