The Fed is likely to tighten monetary policy only by as much as markets allow without major turmoil. The Fed will try to avoid any further asset price inflation and ease any bubbles that have already emerged, such as in the sovereign bond market. During the 2004-07 period, when the Fed continuously tightened monetary policy, bond yields did not react and the housing bubble continued to expand.

Various FOMC members have said that the Fed needs to avoid a repetition of the 2004-07 period. The Fed is likely of the opinion that the US consumer no longer needs a positive wealth effect to sustain consumption growth, given almost full employment, the likelihood of upcoming wage growth and the relief from the lower oil price. The Fed's bond purchases have effectively transferred some of the asset price appreciation related to the economic cycle towards an earlier stage of the cycle, helping the consumer to digest the debt/housing market overhang from the financial crisis. 

Besides rate hikes, the Fed has many tools to steer the process. Their bond holdings can be used to manage US Treasury yields. The policy spectrum ranges from the current reinvestment of any proceeds from their bond holdings, with the option of only partly reinvesting maturing debt or not at all, to outright bond sales. 

"Against this backdrop the Fed should succeed in gradually letting the air out of the bond bubble, and safe-haven bond yields are set to gradually increase. The rising relative attractiveness of sovereign bonds and the unwinding of the 'hunt-for-yield' should weigh on the returns of other asset classes resulting in years of asset price disinflation at the global level," said Commerzbank in a research note.