• By
  • Victoria McGrane

The Federal Reserve’s policy committee concludes its latest two-day conclave Wednesday, and it’s a cliffhanger. The day is chock-full of events: The policy statement and economic projections come out at 2 p.m. EST. At 2:30 p.m. EST, Ben Bernanke steps to the mic for his final scheduled press conference as Fed chairman. Here are five questions about the meeting:

Associated Press
The Federal Reserve building in Washington.

Will they taper? The employment and growth data have improved since the last Fed meeting in October, and Congress has reached a two-year budget deal. This sets the stage for Fed officials to contemplate making the first reduction to their $85 billion-per-month bond-buying program. It’s a tough call. Some will likely argue in favor of waiting a bit longer to make sure the numbers stay strong. Those who want to wait may also argue the central bank shouldn’t pull back while inflation remains so stubbornly below the Fed’s 2% target (The November consumer-price index showed prices up just 1.2% from a year earlier). If officials decide to hold off, they could signal when the first cut is likely to come — say “in the coming meetings” — in the statement or Mr. Bernanke could discuss the timetable at his press conference.

What do they cut? If officials chose to taper, they’ll have to decide what to cut and by how much. Since the start of the year the Fed has been buying $40 billion a month in mortgage bonds and $45 billion a month in Treasurys. Minutes from the Fed’s October meeting showed officials debating the merits of trimming both types of bond purchases versus scaling back the Treasury purchases “more rapidly.” Some officials see evidence that the mortgage bonds have been more effective, and cutting back more slowly on these purchases could “signal an intention to support mortgage markets,” according to the minutes. If the Fed does taper, the first cut will likely be relatively small.

Do they fiddle with forward guidance? Fed officials have been debating for some time whether they should adjust their communications strategy known as “forward guidance” – the statements they make about the likely future course of policy. The Fed has said it plans to keep short-term rates pinned near zero at least until the jobless rate falls below 6.5%, as long as inflation isn’t expected to rise above 2.5%. One idea is to lower the unemployment threshold to 6% or below, which would signal the Fed plans to keep rates lower than currently expected. Another is to add a lower bound on the Fed’s tolerance for inflation, saying the Fed won’t raise rates if inflation is running below a certain level, perhaps 1.5%. Minutes from the October policy meeting showed little consensus on either of these moves, raising questions about whether officials can come to an agreement on changing thresholds at this meeting.

If the Fed does taper, Mr. Bernanke could try to placate some officials reluctant to make that move through adjusting the thresholds. A more likely adjustment would be for officials to add a sentence in the statement stressing that even after the 6.5% milestone is passed, the Fed “can be patient” in judging that the economy is strong enough for the central bank to start raising rates – a point Mr. Bernanke made in his last speech. Such language would be a way for the Fed to enhance its forward guidance without tinkering with the thresholds.

What are their economic projections? Fed officials will release their updated economic projections as well. Keep an eye on their forecasts for inflation and unemployment in 2014 in particular. They have said their decision on pulling back on bond purchases depends on the economy performing as expected. If their forecasts hold up, that would help them justify a decision to scale back the bond program.

How will Bernanke handle his swan song? This will be Mr. Bernanke’s last scheduled press conference as Fed chairman, and therefore an opportunity for him to reflect on the long, strange trip he’s been on over the past eight years. He was the first Fed chairman to hold regular press conferences.