The US central bank has confirmed that it will start to reduce its balance sheet from next month. Although some have gone so far as to call this a historic shift, it hardly seems to have affected the markets. Neither have projections from Fed members suggesting a further hike in the Fed funds rate by the end of 2017, which the market ended up ruling out during the summer. The market reaction has been minimal: 2-year yields have risen barely 3 basis points, and 10- and 30-year yields are up less than 5 basis points.
This ongoing inertia in bond yields is frustrating, particularly because it suggests that the markets have no faith in the Fed’s ability to do what it says. With economic data increasingly encouraging, how can we explain this paradox and what can we deduce from it for the next few months?
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