The Fed is committed to maintaining very accommodative monetary conditions and unchanged interest rates until the economy has returned to full employment and inflation has stabilised above its 2.0% target. But the Fed has so far been vague on what determines the pace of its asset purchases. It is clear that these will have to decline long before it raises its key rates. But when and on what basis?
Tapering has its risks but also its benefits. The challenge for the Fed will be to steer a gradual steepening as history shows that steepening episodes can be quite abrupt and generate volatility on markets.
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