Markets could be challenged in the week ahead as the Fed prepares to

The Federal Reserve is expected to take its first major step away from the easy policy it put in place to fight the pandemic, a milestone on the road back toward normal.

The Fed’s two-day meeting Tuesday and Wednesday is the big event for markets in the week ahead. The central bank is widely-expected to announce that it will begin to unwind its $120 billion in monthly bond purchases and end the program entirely by the middle of next year.

Economic data will also be important, with the October jobs report on Friday. There are dozens of earnings expected, including pharmaceuticals like Pfizer and Moderna, and a host of travel, energy, insurance, and tech companies.

The Bank of England also meets Thursday, and it is expected to raise interest rates. The move comes after rate hikes by South Korea, Norway and others.

“The Fed is part of a global move to remove accommodation, and the market drives right past that,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “In a way, the stock market is playing a game of chicken, with this inflation move and interest rates and the response from central banks.”

Inflation has been running at a 30-year high. Core PCE inflation, which is the Fed’s preferred gauge, jumped 3.6% in September on a year-over-year basis, the same as in August.

Stocks were higher on the week, with the S&P 500 up about 1.1% as of Friday afternoon and up roughly 6.7% for the month of October. Both the Dow and S&P 500 notched new highs in the past week. The widely watched 10-year Treasury yield was at 1.53% Friday afternoon.

Wells Fargo economists expect 390,000 jobs were added in October and average hourly earnings grew by 0.4%, he noted. Payrolls were up just 194,000 in September. Schumacher said inflation is the biggest concern in the markets, so the wage data will be most closely watched.

Schumacher said the market is widely expecting the Fed to announce it will reduce its bond purchases by $15 billion a month, starting either in November or December. The central bank implemented its $120 billion monthly bond-buying program in early 2020, as it slashed rates and introduced programs to buy a range of assets to help keep the markets liquid.

Now, as the program is being wound down, it is what Fed Chairman Jerome Powell says about inflation that matters most because that will drive interest rate expectations.

Yet, Powell is expected to stress that the Fed is not automatically going to raise interest rates once the bond purchases end in the middle of next year. Traders are pricing in as many as three interest rate hikes next year, but in the latest Fed forecast, only half of central bank officials…