Federal Reserve is about to set its post-crisis policy course

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.

Virtually everyone who cares about such things anticipates the policymaking Federal Open Market Committee, upon the conclusion of its two-day meeting, will announce that it is reducing the amount of bonds it buys each month.

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.

Though the move to cut the $120 billion a month in bond purchases has been well telegraphed, there is still risk for the Fed in how it communicates where it goes from here.

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.

For Powell, his post-meeting news conference should be an opportunity to stress the Fed is not on a preset course in either direction.

“He needs to note that there are risks on both sides. Of course, there are risks that the inflation we’ve seen proves more persistent than they hoped,” English said. “I’d like to hear him say there are downside risks. Fiscal policy is tightening a lot.”

Indeed, at a time when the Fed is starting to pull back on its monetary policy help, Congress is providing less help from its side after pouring more than $5 trillion into the economy during the Covid crisis.

Whereas fiscal spending added nearly 7.9% to the economy to start 2021, that has morphed into a drag that will see it subtract close to 3.8% by the middle of…