Dot-Plot has shifted closer to a earlier rate hike in 2022 and more rate hike in 2024. Despite the resurgence of Covid-19 slowing down the re-opening of the economy. The Federal reserve has express a need for rate hike sooner after factoring better than expected GDP at 5.9%. The Federal Reserve members vote were spilt 9-9 on any rate increase in which 3 members expected a 50bp rate hike while 6 expects a 25bp hike. The rest of the 9 members remain unchanged.
The taper tantrum which occurs in May 2013 caused a widespread panic which caused the 10-year yield to spike up by more than 1%, from 1.84% to 2.96%. The adverse reaction was because it was the first time the Federal Reserve at that time has limited experience in handling the QE in the aftermath of the 2008 Financial crisis. Subsequently, the Federal Reserve increased its asset purchases to calm the market. The tapering started in small step in December 2013 and finished in October 2014.
From the historical point of view, the likely taper in December will mimic the process in 2013. The strong language in the meeting minutes have shows a strong desire to taper by 2021. How much to taper will likely be the same in 2013. The estimated amount to taper is likely to be from US$120bn to around US$80bn.
Fed fund rate target will likely increase as the Federal Reserve has signalled an earlier than expected rate hike after the inflation rate has soared above the 2% target and the unemployment rate is improving. Comparing to 7% average in 2013 and 5.2% today’s unemployment rate. The tone has slightly changed on the topic of unemployment and Powell stress that, he is not looking for a specific number but rather a total accumulation of progress. Meaning, the sustainability of jobs provided and the duration of the individuals holding on to a job.
The 10-year yield saw little reaction after the FOMC meeting on Wednesday. The 10-year yield rebounded in early August from 1.12% after a double top was formed. However, the upside remain sluggish and the 10-year yield struggled to break 1.38%-1.42%. Surprise upside will be capped at 1.5% psychological resistance. From the larger technical perspective, we expect the 10-year yield to find comfortable support at 1.00% region.