The Federal Reserve's next job

Media playback is unsupported on your device
Media captionStephanie Flanders looks at whether the upturn in the US economy is filtering down

With all the anticipation around the two-day Federal Reserve meeting that starts on Tuesday, you might think the US central bank was about to take a bold step into the unknown.

In fact, it's where the Fed is now that's the uncharted territory. The decision this week is about whether to take one small step back to the well-known.

In the lead-up to the meeting, everyone has understandably focused on the "taper" - whether and how much the Federal Reserve starts to cut the amount of money it creates every month, to buy bonds. I keep looking for a single occasion when Ben Bernanke has used the "t" word. I haven't found one.

The Fed is creating $85bn (£53bn) a month under quantitative easing (QE) now. That's expected to go down gradually between now and the middle of 2014. The debate, such as it is, is whether that process starts now or in a few months.

Stating it so baldly puts the taper debate in perspective.

For what it's worth, most in the markets expect the Fed to start this month, lowering its monthly US government debt purchases by between $10bn and $20bn.

But the key point, from Ben Bernanke's perspective, isn't the rate at which it buys those bonds, but the amount the Fed ends up with in the end.

Stock or flow

On most plausible scenarios, that big stockpile will be around $4 trillion by the end of the programme, whether the Fed starts to taper now, or in December.

This gets us to the famous distinction that central bankers have drawn, ever since the whole quantitative easing experiment began, between a stock and a flow.

People in markets tend to focus on the flow: the extra amount of money the central bank is spending in any given month.

Central bankers have always said: "it's the stock, stupid". They insist it's not the new bond purchases that are pushing up the price of those bonds - and thus lowering the implied interest rate - but the total amount of bonds the central bank has taken out of the market since the start of QE.

That is an entirely logical argument. It is also one that has largely fallen on deaf ears.

The debate about the taper is a case in point: if people in markets were really only focussed on the total stock of assets the Fed was going to build up between now and the end of the programme, they wouldn't be nearly as interested in whether they cut this month's purchases by $20bn or $10bn. Or whether it happens now or in October.

Rates timetable

Why does anyone think that matters? One answer is that it matters because other investors in the markets think it does.

A more satisfying answer is that investors think it's important, not for it's own sake, but because of what it tells them about the timetable for the first rise in official US interest rates.

Folks at the Fed don't like that at all. They like to say that their commitment to super-low interest rates is entirely independent of the path of QE.

Both sides can agree on one point, that the beginning of the end of QE will put the focus back on the very traditional question of when and why the US central bank is going to raise interest rates.

That question is made more complicated by the Fed's forward guidance. People will be watching to see whether that guidance changes on Wednesday. For example, some think there will be a change to the lower threshold for unemployment - I'll be saying more on that in future posts.

The crucial thing is that this is where the action will be from now on; not debates about the precise amount of bonds the Fed purchases, and which kind.

That is not exactly back to normal, but it's a start.

Media playback is unsupported on your device
Media captionStephanie Flanders examines the impact of the Federal Reserve's stimulus measures