Back in September, the FOMC said that they would start reducing the number of asset purchases in the near future. The market broadly interpreted this to mean that they would start in two months’ time.

Now we’re at that point. And so there is a near-universal expectation that the Fed will announce the start of the taper following the meeting that ends tomorrow.

There are a couple of uncertainties that could push the market around a little bit, though. One is still the matter of timing, the other is the amount, and the third is the reaction from the US Treasury.

With all the focus on the FOMC, the change in the Treasury auction coupon expected for tomorrow is being ignored, despite potentially being the largest market-moving factor.

What to look out for

From the last meeting’s minutes, the conclusion is that the Fed will likely start pairing back its asset purchases by $15B per month. Out of that sum, $10B would be in Treasuries and the other $5B in mortgage-backed securities.

If the Fed accelerates the pace, that could support the dollar. However, if they won’t cut their purchases by as much, then we could see the dollar weaken.

The other factor is the pace.

Last time, each step in the cut was carried out after a meeting. Unlike then, the expectation now is that the Fed will announce a program where each month they will reduce purchases at a fixed amount. The question is whether they will do that immediately, or start next month.

Generally, this won’t have a huge impact. Nonetheless, analysts expect the Fed to try to signal that they won’t be raising rates soon. And one of the ways they could do that is to have a small delay in the effective start of the taper.

What else is happening tomorrow?

Concurrently, analysts anticipate that the US Treasury will announce its auction program for the coming months.

This is in the context of the battle over raising the debt ceiling and increased government funding. The Treasury has been taking measures to reduce the amount of debt it issues to keep from running up against the ceiling.

The expectation is that the Treasury will cut its bond issuance in a similar way the Fed will taper. That is, that they will announce that they will be selling ~$10B less in debt next month.

With the Treasury issuing less and the Fed buying less at the same amount, it effectively means that the treasury market will be unaffected. This would dramatically decrease the possibility of the taper having a major impact on bond yields.

Therefore, the markets are more likely to shrug off the effects.

The anticlimactic end

There has been a lot of anticipation ahead of the actual taper. And that just means the markets are extra ready for it.

If the taper happens in line with expectations, which the Fed has broadly pre-announced, it’s likely that there won’t be a major impact in the markets immediately. Rather, the focus will shift towards when the rate hike will be.

Powell will take pains to assure the markets that a rate hike is still far off. That said, the rhetoric might help provide a more dovish bias to the whole affair. Meanwhile, investors can start worrying about the budget discussion in Washington – again.