As always, Bernanke will use his news conference to try to clarify any decisions the Fed announces. He's surely hoping for a more positive response than he drew at his June news conference. There, he said he'd been "deputized" by his colleagues to describe a possible path toward slowing the bond purchases. Bernanke said the slowdown would likely start before year's end and be completed by mid-2014.
He stressed that any Fed moves to scale back its support would hinge on how the economy fares. But investors didn't hear such assurances. They responded in panic to the prospect that the Fed would soon reduce its support for the economy. The Dow Jones industrial average sank 560 points in two days.
â¿¿ MARKET REACTION
Investor response to a pullback in bond purchases is expected to be mild if the Fed announces a slight reduction of around $10 billion a month. That's particularly true if the Fed balances its move by underscoring its commitment to keep its benchmark rate low far into the future.Economists generally think the Fed has done enough, through comments from Fed officials, to prepare the markets for the start of a modest and gradual reduction in bond purchases. Yet if the Fed's initial move to trim the purchases is larger than investors expect, watch out. The reaction could be turbulent. And if the Fed surprises everyone and decides against trimming its bond purchases at all? The markets may just rally.