When will this happen? My guess is around July 30, when the FOMC reduces its monthly purchases to $25 billion. But it could happen sooner or later. And it will probably be accompanied by a revival—likely a loud revival—of the hawk-dove wars at the central bank. Right now, an uneasy truce prevails, as everyone has signed on to the strategy of gradual tapering. That truce won't last.

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Federal Reserve Chair Janet Yellen and Daniel Tarullo, a Fed governor, during a Feb. 18 meeting. Getty Images


The FOMC will have to figure out how and when to exit from two main policies: its near-zero interest rates and its bloated balance sheet (which should be around $4.5 trillion when the asset purchases end). Hawks and doves will do battle over three main issues:

• How long should the Fed wait between the end of tapering and the beginning of exit? Hawks will be anxious to get started right away; doves will think some hiatus is prudent.

• How fast and how high should interest rates rise? Here both sides probably agree that "normalizing" interest rates means a federal-funds rate between 3.5% and 4%. Hawks will argue for getting there sooner rather than later, while doves will urge patience.

• How quickly should the Fed's balance sheet shrink? Hawks have long worried about the inflationary potential of huge volumes of bank reserves. They will want to shrink it fast. Doves will want to be more cautious.

Former Fed Chairman Ben Bernanke often expressed the view that the Fed's portfolio can shrink fast enough through natural roll-off, as securities mature and are not replaced. The new chair, Janet Yellen, has not yet spoken to that point. But I've always doubted that roll-off would be enough; my guess is that the Fed will have to engage in active selling. Which is hardly the end of the world.

The Fed acquired its enormous balance sheet by buying Treasurys, agency debt and mortgage-backed securities in the open market. It will shrink the balance sheet by selling some of those same securities back in the open market. Not exactly rocket science.

I want to make three important points about the Fed's eventual exit. (Believe me, I am leaving out many boring details over which Fed officials must fret.)

First, both the starting point of the exit and the pace at which it proceeds will be largely determined by the economy. If the economy starts booming or inflation shoots up, the exit will go faster. If economic growth continues at the languid pace of the recovery to date (a paltry 2.2% per annum) and inflation remains low, the exit will be slower. I'm betting on the latter even though the Fed's last published forecast calls for roughly 4% growth over the final three quarters of 2014. (I expect them to revise that forecast down at the next FOMC meeting.)

At her congressional testimony early this month, several Republican lawmakers tried to pin Ms. Yellen down on when the Fed would start raising rates. She politely and correctly demurred—not to be evasive, but simply because she cannot possibly know at this point.

Second, if we take the Fed's goal to be a perfect soft landing at exactly 2% inflation and unemployment between 5.2% and 6% (the Fed's official targets), then the central bank will definitely fail. Ms. Yellen and her colleagues are a smart and highly capable bunch, but they are not miracle workers. Given the magnitude of the exit process, perfection is not in the cards. The Fed will surely err. Its job is to get us out of this mess with only modest errors rather than huge ones.

Third, and sometimes lost in the debate, the Fed could miss in either direction. If it leans too dovish—that is, if it is too hesitant to raise interest rates and shrink its bloated balance sheet—we could wind up with inflation well above 2% and rising. We might also encounter some worrisome financial bubbles along the way. It is precisely this sort of error that agitates the hawks and that now seems to be capturing most of the attention.

But if the Fed leans too hawkish and exits too quickly, the premature tightening of monetary policy could kick the still-crawling economy down the staircase again. If that happens, we might wind up with unemployment above 6% and inflation below 2% and perhaps falling. You don't hear much about that scenario these days, but you should. It's what worries the doves.

Well, to err is human. It's also inevitable with a job this big and complex. A dumb, incompetent or overly-political Fed could make colossal errors that inflict great harm on the U.S. economy. Critics, especially on the right, seem to cast the Fed in this light.

I don't. The major components of exit are clear enough, and the Fed has already articulated crucial parts of its exit strategy. An organization that knew how to blow up its balance sheet (by buying assets and creating new bank reserves) will know how to shrink it (by selling assets and destroying reserves). An organization that knew how to lower interest rates will know how to raise them.

Even a smart, competent and apolitical Fed will make some errors along the way; but they should be small, manageable and correctable. Fortunately, we have a smart, competent and apolitical Fed.


Mr. Blinder, a professor of economics and public affairs at Princeton University and former vice chairman of the Federal Reserve, is the author of "After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead" (Penguin, 2013).