The FOMC met last week.   Facing inflation and tight labor markets, Jerome Powell gave a press conference and stated that the taper of its Quantitative Easing program will accelerate so that bond purchases will end in March 2022.  He indicated that, thereafter, the Fed would consider raising the Federal Funds Rate in an effort to move inflation to the target of 2% by year end.

 

Suppose that the Powell calls a interim FOMC meeting and decides because of worsening inflation expectations, to stop all bond purchases immediately  Further assume that there are no major changes in other pertinent macroeconomic factors like employment, aggregate wealth and domestic production during the next couple of months. What would you expect would happen to market interest rates and bond yields during the first quarter of 2022? 

 

Please justify your answer with either (i) the Loanable Funds Framework or (ii) Aggregate Bond Supply and Demand.    NOTE:  You must commit to one of three outcomes: (a) the yield curve shifts upward, (b) the yield curves shifts downward or (c) there will not be any major changes in bond yields or market interest rates.