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As Fed meets this week it faces many uncertainties
First Published Sep 16 2013 03:04 pm • Last Updated Sep 16 2013 03:08 pm

WASHINGTON • The Federal Reserve is being engulfed by the one thing it tries to prevent: uncertainty.

Will the Fed take its first step Wednesday toward reducing the extraordinary stimulus it’s given the U.S. economy?

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Will its eventual pullback jolt the financial markets?

Who will fill several expected vacancies on the Fed’s policy board next year?

And, with Lawrence Summers’ withdrawal from consideration, who will lead the Fed once Ben Bernanke’s term expires in January, ending one of the most tumultuous chapters in the Fed’s 100-year history?

Uncertainty tends to rattle investors. Starting this week, the Fed may begin to supply the answers the financial markets are looking for.

Here’s a look at the various uncertainties the central bank faces:

TO TAPER OR NOT

Though hiring and economic growth in the United States remain soft, the Fed is widely expected this week to slow the pace of its bond purchases. Its purchases of Treasury and mortgage bonds have been designed to keep long-term loan rates low to get people to borrow and spend and invest in the stock market.

Most economists expect the Fed’s initial move to be small — a reduction in monthly purchases from $85 billion to $75 billion.


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One reason: The Fed for months has been preparing markets for such a move. Fed officials wouldn’t likely want to raise further uncertainty by failing to meet the very expectations they had raised.

Another factor: Some Fed officials don’t think the bond purchases are doing much good anymore. And they feel that by continuing to flood the financial system with cash, the Fed might be raising the risks of high inflation or dangerous bubbles in assets like stocks or real estate.

Some had once expected a sharper first reduction in the Fed’s purchases of around $20 billion a month. But that was before the government said that job growth was only modest in August and that employers added many fewer jobs in June and July than previously thought.

MARKET REACTION

Investors’ response to a pullback in purchases is expected to be mild if the Fed announces a reduction of only around $10 billion a month. That’s especially true if it balances its action by underscoring its commitment to keep short-term interest rates low well into the future.

The Fed has kept its benchmark for short-term rates at a record low near zero since December 2008. And it has said it expects to keep it there at least until the unemployment rate falls to 6.5 percent — as long as the inflation outlook remains mild.

The unemployment rate is now 7.3 percent. Many economists do not expect it to reach 6.5 percent until late 2014 or early 2015.

Even then, Bernanke has said the Fed might decide to keep its short-term rate at a record low, especially if unemployment has dropped because more people have stopped looking for work. The government doesn’t count people as unemployed once they stop looking for a job.

To stress its commitment to keep short-term rates low as long as necessary, the Fed may tweak the language in the statement it will issue Wednesday. It might say that a decline in inflation would cause its benchmark rate to remain near zero longer than expected. One Fed official has also suggested lowering the unemployment threshold for any short-term rate increase to 5.5 percent from 6.5 percent.

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