EXCERPTS:
"The first step toward a tightening is fairly straightforward: stop easing. The Fed is widely expected to end its planned $600 billion of Treasury purchases in June. After that, the act of tightening policy, once it begins, gets more challenging.
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"Selling securities could be especially hard to calibrate. The Fed's rule of thumb is that a $200 billion change in its holdings is roughly equivalent to a quarter-percentage-point change in the federal-funds rate.
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"It faces several challenges.
First, the short-term interest rate that it controls, the federal-funds rate at which banks lend to each other overnight, could be harder to push up than in the past. The Fed has pumped so much money into the financial system that banks are flush with reserves, and that supply will work to hold the rate down.
Second, the Fed's purchases of longer-term securities, an effort to keep long-term rates down and aid the economy, left the Fed bank with $1.3 trillion of long-term Treasury debt and $934 billion in mortgage-backed securities. Over time, officials want to reduce these holdings.
