Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week. 

This past week saw equity markets essentially tread water, as much of the fanfare from the week came from the crypto meltdown. The cryptocurrency market descended into chaos, with several currencies down more than 20% after Chinese regulators signaled a crackdown on the use of digital coins. While recent news flow has triggered capitulation this week, it is not as if the regulatory risk was not known. Similarly, another “Grey Rhino” (apparent dangers that are often ignored anyway) occurred this week in rates markets as "a number" of Fed participants began to talk (in April) of the Fed dialing back its asset purchase program.

This past week, the Fed published the minutes from its April FOMC meeting. The minutes suggest that while participants generally still expect inflation to ease after some transitory factors fade, there are "a number" of participants (we believe more than three) that acknowledge that price pressures might not be as transitory as they had thought. We believe the Fed is signaling their changed trajectory. We expect consensus to slowly build before Chair Powell communicates that it might be appropriate "at upcoming meetings" to discuss a plan for adjusting the pace of asset purchases. In our view, the period of discussing a discussion on tapering is nearing.

The last time markets had to contend with fears around the Fed removing market accommodations was at the ends of 2014 and 2017. Respectively when a divided Fed alerted markets to expect future rate hikes and when the Fed's balance sheet (asset purchases) began to contract. While central banks will inevitably reduce support, we expect accommodation to remain in place for years.

Even when the Fed does begin to wind down its asset purchases, we don't expect any assets to be sold. Instead, we expect the balance sheet will remain flat through reinvestment, similar to 2015 through 2017. The costs of removing accommodation too early are of more significance than the costs of moving too late.

As is typically the case with markets, the issue concerns what is priced in and what is not. Fed Chair Powell has been adamant that markets would receive ample warning of the Fed's plan. Just three weeks ago, at his press conference, chair Powell told us he would be sure to let us know about any such discussion before it happens and added it is still too soon to know when it might be. We believe investors should prepare for more frequent short-term pullbacks over the next several months, as both data and the Fed's communication are likely to persistently evoke concerns that faster inflation will lead to sooner-than-expected adjustments to market accommodations.

This week's economic highlights are April income, consumption, and PCE deflators (the Fed's preferred proxy for inflation). Market focus will also gravitate to scheduled remarks from several FOMC voting members, given heightened sensitivity to anticipatory timing of discussing the discussion on tapering.

Data deck for May 22–May 28: