WHY DID YIELDS QUIETLY MOVE UP LAST WEEK?

The Fed leaned more decisively towards a November taper at its September FOMC meeting than the market expected.

The Committee saw the softening in activity and employment from new Covid-19 cases as largely transitory, but revised up its inflation projections through all forecast years. Consistent with these upwardly revised inflation projections, the median dots moved higher, with the Committee equally split on a 2022 hike and pointing towards a 1.75% policy rate by end-2024, a steeper path than currently priced in.

The bar for a November tapering announcement was set relatively low and this is now our central case. We continue to expect the first rate hike in Q4 2022.

Committee split on 2022 lift-off, three implied hikes per year thereafter: The Committee was split on a rate hike in 2022, while the median dot was revised up in 2023 (three from two), with three more hikes expected in 2024.

This would leave the end-2024 policy rate at 1.75%, still below the 2.5% neutral rate that the Fed continues to see but higher than what is currently priced in by markets.

This is in-line with our forecast of higher 10-year yields in the medium term of 2%.