When the Federal Reserve adjourns its meeting Wednesday, it will be doing more than scaling down its economic aid. The central bank will be charting a course for its post-pandemic future. The process, know as “tapering,” probably will commence before November ends.
In doing so, the Fed will be stepping away from a historic level of support for the economy and into a new regime in which it will still be using its tools to a lesser degree.
Talk up the tapering too much, and investors will get nervous that interest rate hikes are coming. Soft-pedal the move too much, and the market could think the Fed is ignoring the inflation threat. There’s risk to both too much optimism and too much pessimism that the FOMC and Chairman Jerome Powell will have to avoid.
“There’s just a very wide range of possible outcomes. They need to be nimble and responsive,” said Bill English, a former senior Fed advisor and now a professor at the Yale School of Management. “I worry that the markets will think that they’re on a steady track to run purchases down and then begin raising rates when they may just not be. They may have to act more quickly, they may have to raise them more slowly.”
As things stand, the market is betting the first rate increase will come in June 2022, followed by at least one — and perhaps two — more before the year is out. In their most recent projections, FOMC members indicated a small likelihood of pulling the first hike into next year.