WASHINGTON—As the economic recovery evolves from forecast to reality, the Federal Reserve will face a question that has vexed it in the past: how to signal its eventual tightening of the money spigot.

The process of ending the Fed’s giant bond-buying program, and subsequently raising interest rates, will take years unless inflation unexpectedly surges. Its first step down that road will be to start talking about it in the coming months or weeks—Chairman Jerome Powell’s next big test with financial markets.

Officials will begin by debating how and when to scale back, or taper, the $120 billion-plus of Treasury and mortgage bonds the Fed has been buying each month since last June to hold down long-term borrowing costs.

That conversation hasn’t yet kicked off, according to public comments from central bankers and minutes from their March 16-17 policy meeting. The Fed said in a postmeeting statement that the U.S. labor market and inflation would have to make “substantial further progress” before it begins to reduce its bond program. Asked at a press conference whether it was time to start talking about talking about reducing bond purchases, Chairman Jerome Powell said, “Not yet.”

At the time, economic forecasts were calling for a pickup in growth, but hard data were still reflecting a slowdown during the winter Covid-19 surge. That has changed in the past six weeks, with data confirming some of the progress Mr. Powell said he wanted to see.

This post first appeared on wsj.com

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