The Fed has already begun the process of reducing asset purchases, which amounted to $120 billion a month. At their current pace, they will complete this process by March of this year. However, the asset balance will increase to approximately $8.9 trillion upon completion. It is possible that the Fed will cut its balance sheet at some point towards the end of this year.
The overwhelming consensus is that the Fed will tighten its monetary policy by raising interest rates over the next two years. The mood in the market is currently directed towards the high likelihood of three to four rate hikes in 2022, followed by three more rate hikes in 2023.
Earlier this month, Reuters polled 86 economists, and the results showed a minority (40 out of 86) believe the Fed will implement at least a fourfold rate increase by this year.
Moreover, according to the poll, 37 out of 51 economists believe that the central bank will begin to reduce its huge balance sheet by the end of the third quarter.
It is widely believed that market participants have considered the updated tighter monetary policy, which will be announced by the Fed on Wednesday. At the same time, the market takes into account geopolitical tensions.
Western Europe has put its NATO allies on alert, and the United States has announced that it is also putting 8,500 troops on alert.
