By David Randall

NEW YORK (Reuters) – Investors are grappling with how an unwind of the Federal Reserve’s easy money policies could affect asset prices, after the central bank signaled that a taper of its bond-buying program was closer than ever and suggested it may raise rates at a faster-than-expected pace.

The Federal Reserve cleared Wednesday the way for it to reduce its monthly bond purchase as early as November. Nine of the 18 U.S. central banks policymakers have projected that borrowing costs would rise by 2022. This was described as a “hawkish” tilt.

Jerome Powell, Fed Chairman, stated that the U.S. central banking could complete its tapering process in the middle next year if the recovery is on track.

The focus on rate increases comes as investors gauge how markets will respond to an unwind of the central bank’s $120 billion per month bond-buying program, which has helped the double from its March 2020 lows.

Although many expected the central banks to start unwinding before the year ended, some investors were concerned that rate hike projections could cause concerns about whether the Fed will tighten monetary policy when the economy may be weaker than it currently is. In this environment, stocks and other relatively risky assets might not have the same appeal as they are today.

Emily Roland (chief investment strategist, John Hancock Investment Management) stated, “With this bold move, the Fed may tighten policy into a slow growing backdrop.”

Stocks held onto their gains after the Fed’s statement, with the S&P 500 closing up nearly 1%.

After the Fed policy announcement, Treasury markets saw the gap between 30-year bonds and five-year notes fall below 100 basis point to their lowest point since July 2020. An increase in the gap between five-year notes and 30-year bonds could be indicative of economic uncertainty, eased inflation worries or anticipation of tighter monetary policy.

“The rates market interpreted Fed communications as hawkish,” analysts at BoFA Global Research said in a note. “The more hawkish Fed is a key ingredient for our higher rates view into year-end.”

The Fed funds market fully priced in a rate hike by January 2023 after the statement, moving projected rate increases forward by a month.

TD Securities’ analysts believe that the central banking will cut its asset purchases by $15 Billion per month, starting November. This should help to boost yields and strengthen dollar.

It is crucial that investors pay attention to the U.S. currency’s movement as it affects everything, including commodity prices and corporate earnings. Investors who are looking for income will find dollar-denominated assets attractive because of their higher yields. On Wednesday, the greenback was up 0.2% against its peer basket.

“Once the dust settles it seems that there are enough hawkish signals to keep the dollar biased higher, as the market pencils in a sooner-than-expected rate hike,” said Joe Manimbo, senior market analyst at Western Union (NYSE:) Business Solutions.

Others were sanguine on the Fed’s outlook, saying the more hawkish view was a reflection of the economy’s strength in the face of a COVID-19 resurgence.

Mark Freeman from Socorro Asset Management, chief investment officer said that the markets are more likely to be focused on the conclusion that increased rate hikes in 2022/23 will indicate an economy strengthening than on Fed’s tapering plan.

According to him, “Powell repeatedly stated that tapering’s criteria are very different from the criteria for raising rates. This is more important and will have greater market impacts.”

Rick Rieder, chief investment officer of global fixed income at BlackRock (NYSE:), said in a note that robust demand for Treasuries would likely minimize the impact of the Fed’s unwind.

“With the demand for income and financial assets that we’re seeing…, the modest tapering likely to be seen from the Fed is not consequential for markets,” he said.