By Howard Schneider

WASHINGTON, (Reuters) – The Federal Reserve will announce plans Wednesday to stop its Pandemic-era bond buying by mid-2022. Policymakers now shift to what to do to address an inflation surge that has been going on for longer than expected.

In the minutes from their September 21-22 meeting, U.S. central banks indicated that they would approve a “taper” of $120 billion monthly asset purchases at the gathering of Federal Open Market Committee policy-setting members.

According to minutes, the “illustrative tapering pathway” would cut purchases by $15Billion per month starting in November or December and ending at June or July.

(For graphic on Fed balance sheet by era – https://graphics.reuters.com/USA-FED/TAPER/xmpjolmanvr/chart.png)

It is worth noting that the Fed has changed other sections of its policy statement and referred to inflation as “largely reflecting temporary factors”.

Fed officials remain largely in agreement with this opinion. They expect that by 2022, global supply problems will ease. Pandemic-driven demand for goods in the U.S. will slow after huge spending on automobiles, bikes, and appliances. Enough people will want to return to work, so wage and benefit growth will decrease.

However, Fed officials recently acknowledged that there are risks to their outlook. This year’s inflation spike has been longer than expected; headline rates have reached twice the Fed’s 2% target. Rising rents and low inventories may also be contributing factors to the slow pace of price rises.

(For graphic of “Broad based” or non? What is “Broad-based?”? – https://graphics.reuters.com/USA-FED/INFLATION/klpykzrowpg/chart.png)

It is unclear whether inflation will ease before the Fed feels compelled by policymakers to increase interest rates to stop it. The Fed is being viewed by investors as having lost its patience.

In an effort to reduce the economic impact of the pandemic, the Fed reduced its overnight benchmark federal funds rate to a near-zero level in 2017. Trading in federal funds futures currently show investors expecting up to three quarter-percentage-point rate increases in 2022; Fed officials as of September were split over whether there would even be one.

They will keep their temporary definition of inflation. According to Aneta Markowska (NYSE:), an economist with Jefferies, “My best guess is that they will,” to maintain their support for the recovery of the economy until full employment is achieved. If they were honest intellectually, they’d probably abandon it. But given current events in the markets the Fed must tread cautiously.”

Focus too heavily on market expectations by focusing on 5,000,000 U.S. workers still unemployed from the prior pandemic. This could lead to a “unhinge” in the inflation outlook, she said. If you focus too much on inflation risk, it can push rates up, slow the recovery, or even restrict credit.

EYES ON POWELL

It is expected that the Fed releases its policy statement around 2 p.m. ET (1800 GMT). The Fed will not release any new economic forecasts. Fed Chair Jerome Powell will speak half an hour later at a news conference to balance the goals of the central bank to achieve maximum employment and stabilize prices.

Powell, whose term at the Fed ends February 2022, will find this a pivotal moment in his communications career. However, the White House has not yet announced whether or not Powell will be reappointed to another term as an investment banker.

Powell and most Fed policymakers have been supportive of the market throughout the pandemic. This is consistent with their new strategic strategy to permit more risk with higher inflation to encourage job growth.

Current statements by the Fed state that they will not increase rates until inflation reaches its 2% target. However, it appears to be on track to surpass it “for some while,” to ensure that the level of 2% per year is maintained after years in which it has been low.

The exact amount or duration of an inflation overshoot has never been determined. Fed policymakers tend to describe the goal of reaching the inflation benchmark as “a way off” but a few people have noticed that they are already climbing.

(For graphic on Inflation, on average Inflation, on average – https://graphics.reuters.com/USA-FED/FRAMEWORK/byvrjjmbkve/chart.png)

Fed officials were not expecting a change in the direction of the labor market recovery. Although there is a near-record number of open jobs, labor force participation has been slowing. This could be due to workers who are either unable to find work, or those who have family obligations.

The employment-to-population ratio is still 2.4 percentage points below where it was at the outset of the pandemic in February 2020, less than half the ground needed to be covered to return to the previous level.

(For graphic on The jobs hole facing Biden and the Fed – https://graphics.reuters.com/USA-ECONOMY/JOBS/jbyprzlrqpe/chart.png)

Discussions over tapering of Fed purchases of U.S. Treasuries, mortgage-backed Securities and other Fed securities are likely to end Wednesday when the central bank declares that there has been “substantial additional progress” in recovery from the pandemic.

(For graphic concerning “Substantial more progress” of the Fed. – https://graphics.reuters.com/USA-ECONOMY/FEDPROGRESS/yzdvxmmmdpx/chart.png)

Next, the debate will turn to whether COVID-19 has impacted the economy so that there is more inflation and fewer workers.

Tim Duy of SGH Macro Advisors was the chief U.S. economist and wrote before the policy decision: “If the Fed projects inflation will not return to target within an acceptable amount of time,” After this week’s meeting, the Fed may tell the story. Practically, however, the Fed is clear in that it will wait for additional inflation data to confirm if its “transitory” narrative still holds.