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As of now, the dominant market conversation is about tapering. In fact, the FED started to spell-out a plan to implement tapering its asset purchase program. Also, it provided hints about a possible rate hike next year.

Ever since the start of the pandemic, the FED has been supporting the economy by buying $80 billion a month in treasuries and $40 billion of mortgage-backed securities (MBS). This supportive stance has allowed the GDP to recover at a projected rate in excess of 8% for this year. Given the speed of recovery, the Fed may recognize that the economy does not need as much support anymore, and therefore, it may begin to reduce the pace at which it's purchasing those longer-term assets. The pace and the size, though, is subject to further clarification.

Along with the tapering, the FED is expected to raise rates with the aim to control inflation. A number of market participants are now expecting rate hikes starting as early as Q1/2023, even possibly already in Q4/22. Yet, Chair Powell stresses that this is not a consensus view!

About inflation
There are very clear and easy elements that point to inflation being transitory, at least for the time being. Inflation-sensitive sectors such as hotels, leisure, air-travel and used auto prices are all still in disruptive mode, though the pick-up created the CPI increase. For the time being, we consider the price increases as transitory, unless they spill over into the broader price segment.

Jackson Hole Symposium
Tapering, rising interest rates, and inflation go hand in hand! We would expect that the FED is communicating, as in the past, well in advance so that surprises are kept as low as possible. The next major event is the Jackson Hole Symposium (August 26-28, 2021), and the market is geared-up for it. As of now, it can be expected that tapering is to start before the end of 2021 so that by the middle of 2022 the process will be done in full.