As Fed 'taper' looms, so do market surprises?

• Wall Street expects Federal Reserve to finally start pulling back on bond purchases in September
• But the market could be %27surprised%27 if the Fed is either too aggressive or muddies its message
• Market reaction will be driven by how far off the Fed%27s moves are from consensus thinking

NEW YORK -- It's no surprise Wall Street traders have placed their bets on when and how the Federal Reserve will start to cut back on its market-friendly bond-buying program. What could come as a surprise is if the wagers don't jibe with what the Fed announces Wednesday.

Whether the Fed will taper or not has been dissected for weeks. The market reaction will depend on how close what the Fed does regarding its quantitative easing (QE) policy is to the consensus forecast.

The market's view, summed up nicely by a USA TODAY survey of 44 economists on Sept. 11-13, is that the Fed will start tapering its $85 billion in monthly purchases of long-term U.S. Treasuries and mortgage-backed bonds in September (61% said so). Nearly nine of 10 economists (89%) also expect the Fed to at first be cautious, reducing asset purchases by $15 billion or less. Economists expect the Fed's first or deepest cuts will be on Treasuries.

But group think is often wrong. What Fed surprise could cause markets to gyrate violently?

• Delay tapering. If the Fed opts not to taper, perhaps to offset any fiscal-related headwinds this fall, it would likely be viewed as a "positive" surprise, say Boris Rjavinski and Mike Schumacher, fixed income strategists at UBS.

"The market has already priced in a certain amount of taper," says Rjavinski, pointing out that the yield on 10-year Treasuries, which have jumped more than a percentage point since May on taper fears, are back to levels last seen in August 2010, when the Fed's second round of bond-buying kicked in. His point: Some of that move higher in rates might be unwound short-term if the Fed stands pat.

Stocks would probably rally as well on no taper or a gentle taper, "on the basic theory that QE has been good for all assets, including stocks, and that the longer QE lasts, the more positive it is," adds Schumacher

• Do a supersize taper. If the Fed cuts back massively on its monthly purchases by, say, $20 billion to $25 billion, markets would probably drop on fears that higher borrowing costs would hurt the economy, says Jeff Kleintop, chief market strategist at LPL Financial. "Stocks could suffer that 10% correction on fears housing would get hit, consumers would retrench and the growth outlook would turn negative," he says.

• Dial back mortgage paper first. Only 2% of economists polled by USA TODAY think it's a good idea for the Fed to reduce just its purchases of mortgage-backed bonds. "That would be ugly and a shock to the housing market, as borrowers would be confronted with higher rates," says Schumacher.

There are two possible wildcards. One, President Obama taps someone to replace outgoing Fed chief Ben Bernanke who's not currently a member of the Fed's voting committee and who has different views on winding down QE. Two, if the Fed this week makes a change to its guidance.

If the Fed, which now says it will end QE when the unemployment rate is around 7% and won't start raising short-term rates until the jobless rate is at least 6.5%, lowers those thresholds, it could boost markets, as it would suggest the Fed's easy-money policies will be in force longer.