The Fed is set to start draining money from the financial system in 2027 while still raising rates, a headwind for stocks even though the next few months look fine.

• Morgan Stanley expects the Fed to shrink its balance sheet by $1.5 trillion starting in early 2027, spread over two years.
• The Fed would do this quietly, by letting old bonds expire instead of replacing them, which pushes government borrowing rates up.
• Higher rates mean pricier funding for the huge AI data-center buildout, and money that would go into stocks gets pulled into bonds instead.
• Fed officials are talking tough on inflation, saying oil shocks can no longer be ignored and that more hikes will hurt.
• The job market is still holding up, and private payroll data came in better than expected, which is why there's no sign of trouble yet.

Outlook: Markets look calm into year-end, but an Iran deal and the next inflation report will decide how fast the Fed keeps hiking, with the real squeeze arriving in 2027.