The Federal Reserve is set to trim its bond-buying stimulus for a third time in a row on Wednesday, and will probably rewrite its guidance on when it might eventually raise interest rates.
The moves would represent both continuity at the U.S. central bank as Janet Yellen chairs her first policy-setting meeting and a nod to economic reality.
A reduction in the Fed's monthly purchases of Treasuries and mortgage-backed securities by $5 billion each, as widely expected, would bring the monthly total to $55 billion and keep the central bank on track for a measured wind down of the program as laid out by Yellen's predecessor, Ben Bernanke.
Less certain is what the Fed will do about its interest rate guidance. It has said since December 2012 that it would not consider raising short-term rates until the jobless rate dropped to at least 6.5 percent, as long as inflation looked set to remain contained.
But the unemployment rate has already dropped to 6.7 percent, in part because of discouraged job hunters giving up the search, and officials think the economy is still far from ready for higher borrowing costs.
Top Fed policymakers have indicated they are likely to scrap the numerical threshold and move to more qualitative guidance, but exactly how they will frame it is not certain.
The challenge they face is making the change without shifting market expectations for the timing of a first rate hike, now seen as coming midway through next year - in line with views also held by top Fed officials.
Bank of the West chief economist Scott Anderson said the upshot will probably be "a less transparent, and perhaps less helpful, qualitative statement" of the economic conditions the Fed wants to see before raising rates.
It wants to ensure "that another sharp decline in the unemployment rate for the wrong reasons doesn't send long-term interest rates soaring on expectations of an imminent rate hike," Anderson said.
KEEPING MARKETS IN LINE
The Fed has kept overnight rates near zero since December 2008 and has bought more than $3 trillion in long-term debt to keep borrowing costs down and spur investment and hiring.
It began to scale back its stimulus in December, announcing it would trim its monthly bond purchases by $10 billion, after it saw the economy pick up speed in the fall. In January, the Fed said it would cut the purchases by a further $10 billion.
At the same time, it has sought to