Four Questions for the Fed

Here are the four most important questions that the Federal Reserve will answer Wednesday afternoon after the latest meeting of its policy-making committee:

1. Is it Time to Taper?

Since January the Fed has expanded its bond holdings by $85 billion a month â€" $45 billion in Treasuries and $40 billion in mortgage bonds â€" to increase the pace of job creation.

Ben S. Bernanke, the Fed’s chairman, said in June that the Fed intended to reduce its monthly purchases by the end of the year, and surveys show that most Wall Street analysts expect the Fed to announce such a cut Wednesday afternoon. Estimates range from $5 billion up to around $20 billion. A cut in that range would show that the Fed thinks economic growth is strong enough that it can begin to retreat, but only slowly, from its stimulus campaign. The Fed still would be adding more than $60 billion a month to its portfolio.

A decision to keep buying bonds at the current pace would be a modest surprise. Any indication that the Fed might maintain the current pace into next year would be a very big surprise.

A larger cut would also come as a surprise, given the sluggish pace of economic growth and job creation. Fed officials have said they expect stronger growth next year, and they have expressed growing misgivings about the potential consequences of bond-buying. Still, a larger cut would renew questions about the Fed’s commitment to its broader stimulus campaign.

2. What Will the Fed Cut?

The distribution of any taper between Treasuries and mortgage bonds will provide some insight into the balance of power within the Fed. Proponents of stronger efforts to reduce unemployment care more about buying mortgage bonds than Treasuries, because there is some evidence that buying mortgage bonds provides a larger economic lift. It has a direct impact on mortgage rates, which has helped to revive the housing market. More conservative officials, on the other hand, particularly dislike buying mortgage bonds, because it puts the Fed in the position of aiming at a particular segment of the economy. Any reduction in the pace of bond-buying is a victory for the conservatives, but a cut in mortgage-bond buying would be a larger victory.

3. What About Interest Rates?

Investors reacted to Mr. Bernanke’s comments in June by betting the Fed would also begin to raise short-term interest rates earlier than they had previously expected. It was a reaction Fed officials had not anticipated, and did not like. Even as it pulls back on asset purchases, the Fed remains committed to holding short-term rates near zero at least as long as the unemployment rate remains above 6.5 percent. Indeed, some officials have suggested that the Fed should strengthen this “forward guidance” to offset the reduction in asset purchases.

The Fed has two chances to address the issue. It could include language in the statement reinforcing its commitment to low rates. And Mr. Bernanke could try to jawbone investors during his news conference Wednesday afternoon. The first is possible; the second is quite likely.

4. What Can You Tell Us About 2016?

On Wednesday afternoon the Fed will also release the aggregated economic forecasts of the 19 officials who take part in the meetings of the Federal Open Market Committee, and for the first time, those forecasts will include projections for 2016. These forecasts, including predictions about the level of interest rates, offer another chance for the Fed to shape expectations. If officials think the economy will grow more strongly, that forecast would suggest they may decide to retreat more quickly.