One of the unwritten rules of modern central banking is that, unless compelled by events on the ground, officials should refrain from making big policy changes during the summer. With many traders on holiday, any sudden moves risk destabilizing markets.
Look for the Federal Reserve to abide by this rule when it meets tomorrow and Wednesday -- and the European Central Bank to do the same in early August. Janet Yellen and her colleagues on the policy-making Federal Open Market Committee will maintain their well-telegraphed, gradualist approach, reducing monthly bond purchases by another $10 billion, signaling no urgency in raising interest rates, and reminding us of the importance of looking beyond the unemployment rate to understand what's happening in the job market.
Still, behind this comforting "steady as she goes" facade, Fed officials will be dealing with five complex and inter-related issues, the resolution of which will be months in the making:
To what extent is the central bank's policy approach increasing the risk of financial instability down the road? This question is preoccupying a growing number of regional Fed presidents.
How much damage has the recession inflicted on the economy's growth potential and its productivity, thus limiting the effectiveness of Fed policies?
How quickly will this year's faster-than-expected drop in the unemployment rate translate into wage gains, and will they undermine the Fed's 2 percent inflation target?
How should policy makers respond to a seemingly endless series of geopolitical shocks, the cumulative impact of which is getting harder to dismiss?
By carrying the bulk of the economic-stimulus burden, does the Fed risk undermining the political and operational autonomy that is so critical to its effectiveness?
Publicly, the Fed will be in no rush to opine definitively on any of these issues, for understandable reasons. The analytical foundation is still being developed, the market and economic reactions are too uncertain, and the timing is not appropriate.
Yet investors should not be lulled into complacency by the Fed's outward calm. We are getting closer to the point where the Fed will have to make some difficult decisions, and will face greater challenges in maintaining the buoyant, placid markets to which we have become accustomed.