The hawkish tone of Powell’s remarks on November 30 surprised the market and the yield curve flattened significantly as a consequence. While long term rates retreated considerably, the Fed funds futures imply a sooner Fed funds rate hike now, as it is illustrated in the chart.
In September, the market did not price in a rate hike until late 2022, but with Powell’s shift in toning, a first rate hike is now expected in mid-2022. However, despite the expectation that the Fed may accelerate the pace of taper in its December meeting, it will maintain its dovish bias, as the status of the employment market still receives a high weight.
