forward what moves on the minutes maybe nothing does may we see a massive move try in trying to answer that question i think it is going to be an instant challenge today obviously for sykes is a useful commodity in these markets michael mckee is here to help us out bloombergs international economics and policy correspondent and ira jersey chief us right strategies for bloomberg intelligence joining us down the line as well all right im going to start with you lets talk a little bit about what youre expecting from the minutes and what could be the outcome what are the surprises come from yeah i would we know that theyre going to mention that they talked about the balance sheet and the future of the balance sheet i think the question is how much detail do they give us about those discussions and do they give hints about when theyre going to start reducing their balance sheet and by how much we we think here at bloomberg intelligence that they will start very early this time and particularly because theres so much excess liquidity in the financial system right now that its going to take a year before before theyll basically be tightening monetary policy by letting its balance sheet run off so we think that theyll start pretty early but the details of how theyre going to do that will be important because presumably theyll do it passively again like they did during their last bout of quantitative tightening and in doing so we estimate thatll take like i said a year for that excess liquidity to drain off then it will be tightening now whats going to move on that i think that the rates market are more or less expecting something like that so i dont think youll get a big move in the rates market at this point but i agree that risk asset markets might see some volatility on the idea that theyre going to start this early balance sheet reduction so does that mean in terms of just the bond market you feel like if were at 70 basis points for the two and youre looking at 1 6 5 for the 10 that were price for that well the markets anticipating at some point in say the next year year and a half that the fed is going to start balance sheet reduction so part of that is priced into the market i think where youll see the big move is not know sort of the level of rates but you probably will see a little bit more curve flattening because if the federal reserve is easing out easing out of the market in general then that means short term interest rates will probably go up a little bit faster than longer term interest rates i think during the course of the year in general were going to see higher interest rates not not as dramatic as we saw during the course of the entirety of 2021 but you will see a lot of curve flattening because as the fed both starts to hike and then secondly starts to reduce the amount of liquidity in the system both of those things will conspire to have short term interest rates go up a bit faster my you on the same page with our jose when it comes to the talk about reducing the balance sheet how early does it come how does the sequence work as well could that provide a surprise to the sequence and how they do it could provide a surprise if they give us significant information about it i think what youll get is the fed laying out options probably from the staff and they will continue to talk about it at the january twenty seventh meeting but one of the big questions is i reported out is when do you do it they waited two years after tapering last time to start reducing the balance sheet and then they had to stop when they went too far but as far as the impact on the markets and what moves i talked about the bond market let me just point out in the equity market the last time they did this the last time they started a quantitative tightening it had no effect on the s  p 500 they went to years of tightening and the markets stock markets just continued to go up what happened is they went a little too far down in terms of the size of the balance sheet and some of the short rate markets started to seize up and jay paul was forced to reverse course because that fed into the stock market but right now theyre not there yet the question is when do they start and what do they start tapering we could see if they decide to start with mortgages a change in the mortgage rates that could easily affect market the economy more so than some of the other things they could do hey ira im wondering where you think we may see some kind of tantrum if we dont see it in the bond market and i know youre gonna say youre a bond guy nonequity guy but do we see it in tech like do we see it in certain areas of other markets yeah i think it winds up being you know probably a little bit more interest rate sensitive areas of the market so maybe its tack a little bit but i think its going to be probably in the slightly more levered sectors as opposed to as opposed to you know that the less levered you know growth related sectors i think something id like to go back to on something that mike talked about just a second ago and thats what happened after at the end of quantitative tightening in september of 2019 we remember we had what i call the repo hiccup where you had repo rate spike one of the things that the feds done in the interim is they created a standing repo facility so what this does is this allows banks and some other financial institutions to actually get reserves on demand when they need it so so one of the one of the lessons that was learned from the last time the fed did duty is probably not going to be as as problematic as the fed does start to reduce its balance sheet and again i think that theyll do it passively so its going to take a very long time for their balance sheet to to go down by a couple of trillion dollars mike this is rear view mirror stuff were looking back at a discussion that has already happened im interested in the discussion that is going to happen going in to 2022 as we work our way through this year over the last few days this is just anecdotal im just kind of listening to the conversations around me the transitory conversation seems to be coming back there is increasingly this narrative that the fed will struggle to deliver three hikes this year the talk of kutty is way over kind of where we should be what are you hearing what are you picking up in terms of peoples analysis of where were going and when inflation peaks is it now is it later on in the year what kind of inflation are we going to get as we work our way through this year it just feels as if were kind of back to a discussion that that may be actually transitory is the word we should be focusing on not retiring well i think you have to realize that as the old saying goes markets go up markets go down and they price things in a lot faster than the fed moves and the fed offers its views and so you have this constant shifting and the fed has been saying for some time now that it probably needs to raise rates in 2022 the question was always how many times the markets got maybe over their skis the feeling is inflation is going to start to come down partly because of a base effect in the first quarter and the first half of the year but partly because maybe team transitory was right and we wont know for some time about the impact of inflation that its coming from a lot of things that will disappear as the economy normalizes and you can see that in the last couple days we had the esm prices paid no come down a lot and then yesterday the auto industry reported disappointing sales for the month of december and this morning the mortgage bankers reported the lowest number of mortgages made of mortgage applications made since january of 2020 now obviously those things are skewed by the holiday but the trend is clear at this point it looks like the interest rate sector sensitive sectors of the economy were propped up by the governments stimulus in the middle of the pandemic and now that thats gone were starting to see things fall back and so that lends credence to the idea that the fed may have it right the question then becomes how far do they have how right do they have to be how low does inflation have to come down before people react