When it came to September, however, UBS showed more caution. With the Fed having previously stated it wouldn’t begin reducing the balance sheet until it was “well underway” when it comes to lifting rates, UBS saw the sequencing of when the Fed hiked and what economic data – in particular inflation – came out, as key.

“September would also be a natural time for Chair (Janet) Yellen to elaborate on the FOMC’s framework for balance sheet reduction, but that it wants to accumulate more data to confirm that the economy is growing as anticipated,” said UBS, with the economists adding that if all went smoothly data-wise, this could lead to the Fed announcing the reduction of its balance sheet in December.

“The FOMC still feels a sting from the taper tantrum. Even though they believe in their hearts that ‘markets got it wrong,’ they will likely nevertheless try doubly hard to clearly telegraph the balance sheet move (as they have been doing so far). Such caution suggests that they would most likely NOT announce the end of reinvestment and hike at the same meeting. Shrinking the balance sheet depends even more heavily on the data (especially inflation) coming in as forecast.”

“A delay in September would most likely cause a delay in balance sheet unwind,” UBS concludes.