As expected, Chairman Powell turned “tough” at the post-Open Market Committee meeting this week and announced the accelerated wind-down of the Fed open market purchases.  Moreover, the so-called “dot plot”, the committee’s forecast for interest rates, is projecting three rate hikes in 2022 and three more in 2023.  We would have preferred to hear that message last January, but Powell failed to take action despite the rise of inflation and accelerating economy.  Instead, the Fed’s Reverse Repo operation, the mechanism designed to sop up excess liquidity in the system regularly clears above $1.6 trillion and Treasury Bills out to March 2022 are all below 0.05%.  It should be interesting to watch the Fed put their “easy money forever” liquidity machine into reverse and drain the excess from the system without tipping the U.S. into a recession or causing a serious stock market correction.  With regard to the latter, stock pullbacks to date have been looked upon as buying opportunities as corporate America has not lost its taste for equity buy-backs.  However, as rates drift higher, the cost to borrow in the corporate bond market will also rise and at some point the risk/reward tradeoff of buying back stock will lose its appeal.  When that happens is most likely yield curve dependent.  If the Fed is unsuccessful in calming inflation despite 150 basis point of rate hikes, then the yield curve will steepen and selling debt to buy equities may lose its economic appeal.  In the coming months we expect to hear more hawkish talk out of the Fed but do not expect a sea change in capital markets.  However we will be watching closely for clues to changes in that behavior.