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Federal Reserve faces many uncertainties

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

Will the Fed take its first step at Wednesday's policy meeting toward reducing the extraordinary stimulus it's given the U.S. economy? Will its eventual pullback jolt the financial markets?

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. 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.

Market reaction: Investors' response to a pullback in bond 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.

After Bernanke: Bernanke's second four-year term as chairman expires Jan. 31, and he's made it clear he isn't interested in another term. The two leading candidates to succeed him had been former Treasury Secretary Lawrence Summers and current Fed Vice Chair Janet Yellen.

But in a surprise, Summers announced Sunday in a letter to President Barack Obama that he wished to remove himself from consideration for the job. Yellen, the highly respected No. 2 official at the Fed, is seen as likely to get the nomination now. But analysts said a dark horse candidate can't be ruled out.

Those candidates include former Treasury Secretary Timothy Geithner, though he has said repeatedly that he isn't interested in the Fed job.


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