The buzz surrounding the upcoming Federal Reserve meeting is centered on two questions: Will the Fed taper in September? And will financial markets respond as they did back in June in what we now call the “taper tantrum?”

To the first question, our answer is yes; but to the second, no.

So first, yes, we expect the Fed to begin reducing its pace of purchases of securities (both mortgages and Treasuries) and to announce this change at the conclusion of its September 17-18 two-day meeting.

Certainly, much can change between now and then. Should we see weaker-than-expected economic data, it might push back the starting date for the beginning of the end of the Fed’s program of purchases. Crucially, however, a likely September start to tapering is the consensus expectation–hence it is already priced in.

This is the crux of why we answer no to the second question. Conditions were different in late May when the Fed started to signal a shift in policy. The Fed’s statements, combined with its downgrading of the risks facing the economy and its above-consensus economic forecasts, all served to surprise the markets.

At that point, the Fed upgraded its outlook when the market expected it to downgrade. It wasn’t just the shift in policy; it was the shift relative to expectations that led to the violent and negative market reaction that followed: both bonds and stocks fell.

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