Likely before the end of the year, the Federal Reserve will start to tiptoe into the unknown.

Central bank officials indicated Wednesday that they’re ready to begin “tapering” – the process of slowly pulling back the stimulus they’ve provided during the pandemic.

Although the Fed has been in policy retreat before it never needed to reverse its amazingly accommodative position. It has purchased at most $120 billion in bonds per month over the past 12 months. It provided unprecedented financial market support and economic recovery.

The bond purchases have added more than $4 trillion to the Fed’s balance sheet, which now stands at $8.5 trillion, about $7 trillion of which is the assets bought up through the Fed’s quantitative easing programs, according to the central bank’s data. These purchases helped to keep interest rates low and provided support for markets that had been badly affected by the outbreak of the pandemic. They also coincided well with an impressive run in the stock market.

In light of the role the program has played, Fed Chairman Jerome Powell assured the public Wednesday that “policy will remain accommodative until we have reached” the central bank’s goals on employment and inflation.

Markets thus far have taken the news well, but the real test is ahead. Tapering is a gradual increase in future rate increases, but they are still at least one year away.

Kathy Jones from Charles Schwab’s fixed income department said, “It has been clearly communicated so I don’t think that it should be a surprise to anyone or cause disruption to the markets.” “The question really is more around asset prices than [interest] rates. Asset prices are highly valued. How does the shift from easy money to asset prices affect asset prices?

The answer so far has been … nothing. The market rallied Wednesday afternoon despite what amounted to a preannouncement for Fed tapering, and roared higher again Thursday.

The Fed’s exit from money printing operations will determine how things turn out.

Powell’s general tone during this post-meeting news conference surprised Jones. According to the chairman, he has repeatedly expressed satisfaction with the achievements made towards price stability and full employment. Powell declared that the Fed has exceeded its comfort level for inflation and “that part is done”, in his view as well as many other observers.

Schwab’s Jones indicated that “the tone was perhaps slightly more hawkish when it came to tapering.” It was “OK that comment by Powell that the Fed would finish in the middle next year. That’s like saying, ‘OK. We had better move on here. If we’re going do that.

Jones claimed that Powell’s comments as well as the Fed’s plans to reduce tapering were indicative of a high degree of optimism that the economy will recover from the recession caused by the pandemic. It was the longest and most destructive in U.S. History.

The Fed has told us it expects that both growth and inflation will be strong in the coming year. They are ready to end their easy policy,” Jones said.

The summary of individual members’ rate forecasts – the vaunted “dot plot” – indicated a slightly more aggressive posture. It is not clear whether the 18 policy-making members of Federal Open Market Committee will vote to increase the quarter-point rate next year.

Officials expect three additional hikes to the Fed benchmark borrowing rate in 2023, and 2024. This would bring it to between 1.75% to 2% from its current range of 0 to 0.2%. Powell said that while the Fed will not raise rates immediately and will probably wait until tapering has been completed, it will make sure the markets are watching out for any further hawkish signals.

The next Fed meeting will be very interesting. It should give us a lot more volatility than we’re seeing now,” said John Farawell, head trader with bond underwriter Roosevelt & Cross. They did seem more hawkish. Data-driven, it will be all about Covid.

Investors will see a different world where the Fed provides support, although not in the same way as before. While the mechanics sound simple things could get complicated if inflation continues to run above the Fed’s expectations.

The FOMC increased their core inflation forecast for 2021 to 3.7% from the June 3% projection. There are many reasons to think that this forecast has a lot of upside.

For instance, in recent days economic bellwether companies including General Mills and Federal Express have indicated that prices are likely to rise. The price of natural gas has risen more than 80 percent this year, which will lead to significantly higher energy prices in the winter months.

UBS predicts that the tapering news and economic conditions will put upward pressure on yields. The benchmark 10-year Treasury will rise to 1.8% before the end 2021. UBS stated in a note to clients that this is only 40 basis points below its current level, but it “shouldn’t have a significant adverse impact on borrowing costs for individuals or companies.”

In anticipation of rising rates, investors may sell bonds to make way for lower yields and more Fed support. Yields also move in opposite directions.

UBS analysts say that investors need to remember that the Fed is making progress because it’s becoming more optimistic about the economy and will continue providing support.

The firm stated that while higher yields on bonds may make equities less attractive, the gradual increase in yields shouldn’t be outweighed by rising earnings when economies recover from their normal state. Tapering is the gradual withdrawal or normalization of an emergency assistance measure.