WASHINGTON—The Federal Reserve is expected to clear the way on Wednesday for reductions to its monthly asset purchases later this year and show in updated projections whether higher-than-expected inflation or a resurgent coronavirus pandemic is weighing more on the economic outlook. Fed policymakers, who are wrapping up their latest two-day meeting, have been handed a conflicting set of developments since late July—signs of a slowdown in the service sector, a COVID-19 surge that has eclipsed that of last summer and weak job growth in August, all alongside still strong inflation—and been conflicted among themselves about how to react. Officials have for the most part said the economic recovery will continue and allow the U.S. central bank to proceed with plans to reduce its $120 billion in monthly purchases of Treasuries and mortgage-backed securities by the end of 2021, and wind them down fully over the first half of next year. …
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