STOP SHRINKING BOND HOLDINGS?

One of the extraordinary programs the Fed deployed after the 2008 financial crisis to stabilize the economy was the purchase of billions in Treasury and mortgage bonds. The idea was that these bond purchases would help hold down long-term borrowing rates and thereby stimulate borrowing and spending.

It was called quantitative easing. And while it likely helped revive the economy, it also ended up swelling the Fed’s balance sheet more than fourfold, from under $1 trillion to a peak of $4.5 trillion. In October 2017, with the economy back on firm footing, the Fed began shrinking its portfolio by allowing some maturing bonds to roll off its balance sheet rather than being reinvested. As a result, the balance sheet is now down slightly to $4 trillion.

As this runoff from the Fed’s balance sheet has proceeded, investors have grown worried that the Fed could overdo the bond reductions and inadvertently cause long-term rates to surge. That would risk depressing economic growth as well as stock prices.

When Powell suggested at a news conference in December that the runoff from the Fed’s balance sheet was on “automatic pilot,” he alarmed

investors, who began dumping stocks. Powell has since reversed course. He has increasingly stressed the Fed’s patience and flexibility toward all elements of its policymaking, from its benchmark rate to the runoff from its balance sheet, depending on how severe the economic risks appear. And the chairman has said that the reduction in its bond holdings will end soon, with a balance sheet probably no lower than around $3.5 trillion.

In recent appearances, Powell has said the Fed has been discussing a plan to end the runoff from its balance sheet. Many analysts think the Fed will specify Wednesday at what point this year it plans to halt the reduction in its bond holdings—something of keen interest to financial markets.

THE PACE OF GROWTH

The U.S. economy grew 2.9 percent in 2018, its best showing since 2015, the government has estimated. President Donald Trump has hailed this achievement, and the budget plan he released last week projects sustained growth of 3 percent or better for years to come.

But the Fed and most private forecasters think those estimates are far too optimistic. They have suggested that a slower-growing workforce, reflecting the retirement of America’s baby boomers, and tepid productivity gains, along with a weaker global economy, will depress growth. In December, the Fed forecast growth of 2.3 percent this year, 2 percent in 2020 and just 1.8 percent in 2021.

Analysts will be watching the Fed’s updated forecasts to see whether it further downgrades its expectations for growth. Doing so would suggest that it has grown concerned about how a persistent global slowdown might dim the outlook for the United States as well.

Any significant markdown in expected growth might be a signal from the Fed of a major forthcoming shift in course: Under this scenario, the Fed might decide later this year not merely to keep rates where they are but to actually reduce them to ease borrowing rates and help sustain the economic expansion and avoid a recession.

Whether such a message would cheer or spook the markets, though, is anyone’s guess.