After Monday’s market turbulence, the Federal Reserve’s challenge will be to sound reassuring while acknowledging it’s preparing to make its first major step away from the easy policies it put in place to fight the pandemic.

The Fed will release a policy statement along with the economic and interest rate forecasts it issues quarterly at the end of its two-day meeting Wednesday afternoon. Fed Chairman Jerome Powell is expected to brief the media at 2:30 p.m. ET. The central bank is widely expected to indicate it is getting ready to announce it will start paring back its $120 billion in monthly purchases of Treasurys and mortgage-backed securities.

“I think they’re going to lay out that they had a discussion on tapering. I don’t think they’re going to provide any details. I think they’re going to provide a framework where they can start doing it in November or December,” said Rick Rieder, chief investment officer of global fixed income at BlackRock.

The Fed’s meeting began Tuesday, following a turbulent day in global markets, on worries that China’s big property developer Evergrande could collapse and spread contagion outside China’s borders. The S&P 500 had its worst day since May, but on Tuesday stocks stabilized a bit as investors looked to the Chinese government to contain the situation.

“Does the last couple of days’ price action in markets or China have an influence on their thinking? My guess is it’s going to enter the discussion, but I still think they’re going to end up in the same place we were going to end up in,” said Rieder.

He expects the Fed to cut back the purchases at a pace of $10 billion Treasurys and $5 billion mortgage-backed securities a month, once it starts the taper.

What could move markets

“By and large, the tapering is probably not a market moving event,” said Anwiti Bahuguna, head of multi-asset strategy at Columbia Threadneedle. She said that on Wednesday the focus will be heavily on the forecasts and the Fed’s “dot plot,” the chart it uses to present the anonymous interest rate forecasts of central bank officials.

While the Fed’s move away from asset purchases may be well broadcast, strategists say its interest rate forecast may be a wild card for markets. Tied closely to that will be the Fed’s expectations for inflation. In June, it forecast 3.4% for the personal consumption expenditures inflation index this year, before falling back to 2.1% in 2022.

Also in their June forecast, Fed officials targeted the first two increases to the fed funds target rate in 2023, but there’s a risk that could change. Two officials had expected the first hike in 2022, and many market pros are betting on a hike by the end of next year.

“If we just see two or three members change their minds that could be a hawkish surprise. There is no chance that [Fed officials] will take the dots off, so the risk is that there are more dots that appear in 2022 and 2023, and the market starts thinking the rate hiking cycle commences next year,” said Bahuguna. She said that would be a “hawkish” message that would be negative for stocks, and it could result in higher interest rates at the short end of the Treasury curve.

In June, the addition of dots to the 2022 forecast was a surprise, and suggests that some Fed members see the increase in inflation as something more than just transitory, she said. There is a risk that could happen again if more Fed officials believe that inflation is more persistent.

Powell has repeatedly stressed that he believes the jump in inflation is temporary, but some officials inside the Fed have pushed back on that idea.

Consumer price index inflation has run above 5% for the past three months, though the pace cooled slightly in August.

Rieder does not expect the Fed to change its interest rate forecast for 2022, though it will reveal its forecast for 2024 for the first time. Those longer term forecasts often change, he said.

“I still think they can taper and leave a window, an option for them to move and start to raise rates in 2022,” Rieder said. “I do think they will delink the taper from rates, but that will provide them the optionality to actually be able to go in 2022, assuming employment continues to improve … But I don’t think they in any way, shape or form transmit that that’s their base case, by any stretch.”

Push back on rate hikes

Rieder said by emphasizing the end of the bond purchase program does not mean a rate hike is coming, the Fed will make the taper seem more dovish.

But still the bond market will focus on the rate hike projections and inflation.

“Powell will probably do his best to distinguish and decouple the association of tapering and rate hikes,” said Mark Cabana, head of U.S. short rates strategy at Bank of America.

“We think that they’re going to make some modest adjustment to their overall economic and inflation forecasts,” said Cabana. “So we think they’re going to mark down growth this year, given some of the softness of recent data. They’re going to mark up inflation given some of the firming we’re seeing. The real focus will be on the dots. We anticipate still no hike in 2022, but they will add 2024. We anticipate that will show three additional hikes in 2024.”

Rieder has been a proponent of the Fed moving to wind down its easy policies. He said Fed policy and the economy are no longer working the way they had.

“I think there’s something critical here,” he said. “For our generation, we’re used to when the data softens, monetary policy has usually been a driver of the modulation… but the softness of the data is coming exclusively from the supply side which is not affected by monetary policy.”

Demand is high but supply chain issues and shortages have resulted in a slower economy. By stimulating the economy with easy policy, the Fed adds to that dynamic.

Market pros also expect Powell to be asked about recent reports that Fed officials owned and traded securities. An in-depth look by CNBC at officials’ financial disclosures found three who last year held assets of the same type the Fed itself was buying, including Powell who held municipal bonds. Boston Fed President Eric Rosengren invested in REITs and Dallas Fed President Rob Kaplan owned corporate bonds. The trades appear to be in compliance with Fed rules, and the Fed is conducting a review.