Uncertainty abounds with Fed
WASHINGTON — The Federal Reserve is being engulfed by the one thing it tries to prevent: uncertainty.
Will the Fed take its first step on Wednesday toward reducing the extraordinary stimulus it's given the economy?
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. 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 expectations they had raised.
Some Fed officials don't think the bond purchases are doing much good. They feel that by flooding the financial system with cash, the Fed might be raising the risks of high inflation or bubbles in assets such as stocks or real estate.
Some had expected a sharper first reduction in the Fed's purchases of about $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.
Investors' response to a pullback in purchases is expected to be mild if the Fed announces a reduction of only about $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.
Bernanke's chair is one of several that will need to be filled in coming months. In fact, the Fed's policy panel will have only 10 voting members at this week's meeting instead of the normal 12. Two more vacancies may occur next year.
With former Treasury Secretary Summers' withdrawal on Sunday, Fed Vice Chair Janet Yellen, the No. 2 official at the Fed, is the likely nominee, but analysts said a dark horse candidate can't be ruled out.