The Fed had recently a two-day meeting that resulted in major announcements for the market; they plan to buy fewer bonds. Analysts acknowledge the Fed has not done anything like this before and the reason why they chose this approach is to slowly reduce their balance sheet. The market hasn’t responded to the announcement yet but analysts believe the market’s reaction will depend upon the interest rates predicted by the Fed.

The Fed’s program to buy more bonds started at the end of the financial crisis in 2008, the plan was implemented to fortify the country’s economy. Currently, the Fed has accumulated $4.5 trillion in assets and they don’t plan on replacing the bonds that mature. Instead they want to allocate $10 million a month to purchase bonds and securities. The amount will be increased each quarter until it adds up to a total of $50 billion. That initial change won’t affect the market much; the climax is going to be in about one year from now when the Fed’s balance sheet reduction is way more significant.

Well’s Fargo director of strategy, Michal Schumacher states its unusual how the market hasn’t responded yet to the Fed’s decision. He also believes that yields could move upward eventually based on past Fed interest rate volatility. In agreement to Schumacher, Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch also believes it is “surprising” how the market has not responded to the changes about to happen by the Fed. He states that they will take out about $1.4 trillion of the market until 2021 and the market should provide some kind of response to this change already.

In order to make up for the Fed’s balance sheet reduction, private investors along with banks will also have to be proficient in buying more Treasuries and mortgages. The prediction with this change is that long-term rates will be raised which is parallel to the raise in bond prices.

However, global Rick Rieder, a former chief of investment at BlackRock believe rates won’t go to high because there will still be a global demand for bonds. He also adds that U.S. yields are still more attractive than Japan and European bonds.

All in all, the discussion whether rates will raise and yields will move lower is still up in the market. Even though the Fed wants to separate the balance sheet announcement from the interest rates there is still a expectation that the change will affect the overall rates in the market. It is also highlighted that it would be critical if the Fed reduces liquidity and changes tax policies, instead they should normalize policies and cut interest rate forecasts for a more stable transition.