The Next Step in the Fed’s Beautiful Normalization

The Federal Reserve on Wednesday is expected to provide details on the implementation of the next step in what so far has been an orderly gradual multiyear normalization of unconventional policies, a process that has confounded many who saw the May 2013 "taper tantrum" as a precursor to the unsettling volatility to come. Here is how to think about the what and the why, and their potential implications for what’s ahead.

At the end of its two-day Open Market Committee meeting, the Fed is likely to provide operational specifics on the measured and conditional reduction of its $4.5 trillion balance sheet -- namely, the timetable for the roll-off of its holdings of Treasury and mortgage securities. Officials aren't likely to signal major revisions to their interest rate forecast (the blue dots). Specifically, they will refrain from meaningfully validating what currently is too low a market probability of a hike in the remainder of the year. That policy guidance is more likely to come later.