As Fed meets this week, it faces many uncertainties

Associated Press

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?

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 Ber- nanke’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 various uncertainties the central bank faces:

TO TAPER OR NOT

Though hiring and economic growth in the U.S. 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.

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.

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.

FED COMMITTEE VACANCIES

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. Obama hasn’t said publicly whom he might choose to fill those vacancies. Some published reports have suggested that Lael Brainard, Treasury’s undersecretary for international affairs, is under consideration for one of the open board seats.

The vacancies are sure to raise questions about the Fed’s future course of policy.

AFTER BERNANKE

Bernanke’s second four-year term as chairman expires Jan. 31, and he’s made clear he isn’t interested in another term. The speculation over who will succeed him has been Washington’s favorite guessing game this summer. The two leading candidates had been former Treasury Secretary Lawrence Summers and current Fed Vice Chairwoman Janet Yellen.

But Summers announced Sunday that he wished to remove himself from consideration.

Yellen, the highly respected No. 2 official at the Fed, is seen as likely to get the nomination now.