Expect the Federal Reserve to announce Wednesday a significant policy shift, which will open up opportunities for next year’s first rate rise.

The market expects that the Fed will accelerate the sale of its bonds, moving the date from June to March.

This would allow the central bank freedom to raise interest rates starting at zero. Fed officials expect to publish a forecast showing that there will be two to three rate increases in 2022, as well as three to four more in 2023. There had not been consensus on the possibility of a rate rise in 2022. However, at least half of Fed officials anticipated one.

After its Wednesday afternoon meeting, central bank officials should acknowledge that inflation is not the “transitory”, or temporary problem they thought it would be. In fact, increasing prices might pose more of a threat to the economy than previously believed. It rose 6.8% in November and could rise again in December.

Rick Rieder (chief investment officer global fixed income, BlackRock), stated that “I believe getting out of this easing business it very much overdue.”

In order to counter the effects of pandemics, the Fed implemented its quantitative-easing program early in 2020. It also reduced its Fed funds target rate to zero.

In mid-November, Fed officials began to talk about a rapid taper. They have succeeded in shifting market expectations and influencing the markets to seek a speedier end to their one-time $120 million per month bond purchases. Market expectations have also moved forward on the timing of interest rate increasesYou can start in June or later next year.

Rieder claimed that the Fed could raise interest rates by stopping bond purchases sooner than it did. “I believe that they will raise interest rates in 2022. Rieder indicated that he does not believe there’s a rush.

He predicted that the Fed would raise its rates by two times in 2022, three-to four times in 2023 and twice again in 2022.

“I believe that the data will dictate when they begin. He said that he didn’t believe the Fed believes they must start in any particular quarter. The Fed will be better able to determine how much persistent inflation there is, and whether or not the virus remains a threat to the world economy.

The Fed may seem hawkish and in tightening mode. However, Fed Chairman Jerome Powell might sound less confident when speaking to the media at 2:20 p.m. ET Wednesday at 2:30 p.m. ET, after forecasts and statements are published by the central bank.

“For them to justify speeding up the taper, the FOMC statement has to be pretty abrupt,” said Vince Reinhart, chief economist at Dreyfus & Mellon. Powell is likely to discuss hotter inflation but also explain why the Fed might remain cautious.

Reinhart said, “We retired as ‘transitory’. But transition is a huge one. He made a rapid transition.” Reinhart stated that Reinhart would be able to spend time discussing the possible virus mutations as well as the risk factors and potential problems.

Markets are most concerned about what the Fed has to say about its balance sheets, which were $4.1 trillion at the beginning of January 2020, just before the pandemic. but has swollen to $8.7 trillion.When securities on the balance sheets mature, they are replaced by the Fed, which buys additional trillions in Treasurys every month.

Rieder stated, “That would be quite surprising for the market if he declared that we don’t need to reduce the size to these levels.” He stated that the Fed would be more inclined to lower its balance sheet if it increases interest rates.

However, the Fed’s eventual reduction in its balance sheet may have a bigger effect on the market than an increase of interest rates.

The runoff scenario was outlined by Goldman Sachs economists. They suggested that it could be more conservative than in the previous cycle after the financial crisis. If the Fed permitted securities to mature and did not replace them, runoff would start.

“We predict the fourth rate rise in 2023H1, which is why our best guess at this point is that runoff will start around that date. Their research suggests that runoff should have a modest impact on interest rates and broader financial conditions. This is much lower than the expected rate increases. Markets have often reacted strongly in the past to cuts in balance sheets accommodation.”

Grant Thornton’s chief economist, Diane Swonk, believes the Fed will talk about the balance sheet but not move on it at its meeting.

Swonk stated that he believes he would be asked about his balance sheet. Swonk said that they had previously attempted to drain their balance sheets. We should also expect that this will happen more quickly. It’s not clear that they have made this decision. I would be very surprised to see them make it. [meeting] minutes.”