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At the June meeting, the Federal Open Market Committee (FOMC) signaled a more hawkish stance towards its monetary policy outlook driven by materially stronger growth and inflation outlook in the medium-term. Economists at JP Morgan continue to expect yields will grind higher through the end of the year and strong economic growth accompanied by still relatively accommodative monetary policy will provide support to equity markets.

Committee’s optimistic view should prompt a reduction in asset purchases next year, followed by rate hikes in 2023

“The statement and committee projections reflect the committee’s view that fiscal support and continued vaccination efforts will provide a strong boost to growth and strengthen the recovery in the labor market, while potentially causing more persistently higher inflation than originally forecasted.”

“The median dot plot now reflects two rate hikes sometime in 2023, up from no rate hikes just three months ago. Moreover, 7 of 18 members believe a rate hike might be appropriate sometime in 2022, up from four in March. While Chairman Powell suggested the median dot plot should not be viewed as a definitive path forward to short-term rates, it’s clear the committee has shifted to a more hawkish stance, reflecting its more optimistic outlook on the economy.”

“Interestingly, when asked about the timing of the reduction in asset purchases, Chairman Powell shied away from providing new details but did say the committee was discussing tapering. Indeed, taking the committee’s interest rate forecast and economic projections together, it seems tapering would be appropriate in 2022, especially given rate hikes are now expected in 2023. We now expect the committee will lay out its tapering plans at the September meeting.”

“We continue to expect yields will grind higher through the end of the year and strong economic growth accompanied by still relatively accommodative monetary policy will provide support to equity markets.”