- The Fed will be able to hit their inflation target. Technically raising the federal fund rates, increase the cost of borrowing which cause inflation to rise. 2) we will not have an inverted curve because medium to long term rates are more sensitive to inflation than the short term federal fund rates because of the effect of compounding. Therefore, the medium and long term rates will go up higher than the increase in federal fund rate. 3) The Fed is not transparent about the assets they acquired when they jacked up the balance sheet from 0.8 trillion to 4.5 trillion. Therefore, I don't know and I don't think anybody knows how successful the process of winding down their balance sheet will be. One thing that is certain is Yellen will take too many small steps (which is a Japanese model) in winding down the balance sheet and observe market reaction throughout.
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