(Bloomberg) – All the talk in financial markets these days is about when the Federal Reserve will start cutting its debt purchases. What’s more important, for everything from stocks to bonds to currencies, is when they end.

There were few major moves ahead of the Kansas City Federal Reserve Bank’s virtual Jackson Hole symposium, where President Jerome Powell on Friday could provide insight into how and when officials will begin to withdraw support from the bond market. This will set the timeframe for how long the Fed will raise interest rates.

The stakes are high, with the influx of liquidity into the financial system pushing US stocks to record highs and Treasury yields holding just above six-month lows. Too rapid a withdrawal could derail the economic recovery just as the push of the delta variant poses a new risk. Moving too slowly could fuel the inflationary pressures unleashed by the reopening following the pandemic.

“The key to the markets is how quickly the Fed removes the accommodation, as that dictates the time frame until we run out of it, which then results in the first rate hike,” said Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Newsletter.

The Fed is currently buying $ 80 billion a month in treasury bills and $ 40 billion in mortgage-backed securities, which the bank is expected to liquidate before raising interest rates. He said he would maintain these purchases “until further substantial progress has been made towards his maximum employment and price stability targets.”

When the Fed unwound a similar $ 85 billion-per-month program in the aftermath of the last recession, it took 10 months. The cuts were announced in December 2013 and began the following month, with the Fed detailing cuts of $ 10 billion at each policy-making meeting, split evenly between treasury bills and mortgage bonds. The Fed closed all purchases in October 2014 and continued to hike rates in December 2015 after holding them steady for seven years.

Essaye believes that it is very likely that the tapering will start in December and not end until the end of 2022, which he says will help generate more gains on equities and commodities and send the return to 10 years towards 2%.

Money market traders are currently assessing whether the Fed will first hike rates in the first quarter of 2023 – with the funds rate peaking at around 1.4%.

“When the Fed actually announces the cut, it will probably also give some degree of information on the pace it will take and the flexibility or rigidity it wishes to have with the process,” said Guneet Dhingra, head of the process. US interest rate strategy at Morgan stanley (NYSE :). “This could provide a key signal for the rate hike cycle, especially in terms of the pace of hikes.”

Ten-year Treasury yields have been falling steadily since March and are now around 1.3%, not far from record lows, as the resurgence of the pandemic in the United States could slow the recovery. The spread between long-term and short-term yields has also narrowed since it peaked more than five years in March, a sign of speculation that the Fed will begin to withdraw its stimulus package. The prospect of higher rates boosted the dollar, pushing the currency this month to its highest level since November, according to the Bloomberg Dollar Spot Index.

Morgan Stanley predicts that 10-year Treasury yields will end the year at 1.8%, with the Fed starting to decline in January and ending in October. The firm predicts that the Fed’s first rate hike will come in the second quarter of 2023.

Steven Barrow, head of G-10 strategy at Standard Bank Group, said there was more risk if the Fed delayed its cut than if it moved too soon. He said a delay could force the central bank to raise rates just months after its bond purchases are finished, which could shake up financial markets and fuel a decline in risk that would send investors to havens like the Japanese yen and the Swiss franc.

“It would be dangerous for the Fed to do this because it must be able – from the middle of next year – to start expressing the rhetoric that it might be able to raise rates,” Barrow said. “And we know that it is not excluded that the Fed could raise its rates towards the end of next year. So I’m focusing more on the end point of the Fed’s tapering than on the starting point. “

St. Louis Fed Chairman James Bullard has said he would like to see the decline end by the first quarter of 2022. Raphael Bostic of the Atlanta Fed said it should start after a few stronger employment reports and completed faster than in previous episodes.

Normalization is more at stake this time, because the context of rates and easing close to zero is accompanied by historic over-indebtedness and an almost record duration, indicating how sensitive the bond market is to changes in rate. It’s a risk that extends to stocks, even tech stocks that have skyrocketed after the start of the pandemic. The cheap money that was pumped into markets around the world, driving bond yields down, fueled a search for yield that showed signs of bubbles almost everywhere.

“Margin liquidity is what matters in these markets,” said George Goncalves, head of US macro strategy at MUFG Securities Americas. “So the reduction will affect peripheral assets, starting with cryptocurrencies and including some stocks and high yield debt, more than Treasuries. These titles will have to be sufficient on their own.

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