Federal Reserve officials are walking “a bit of a tightrope” at this week’s meeting as they weigh the risks that the coronavirus’s delta variant induces an economic slowdown against the chances of hotter-than-expected inflation in coming months, according to RBC Wealth Management’s Tom Garretson.

Any acknowledgement by Fed Chairman Jerome Powell on Wednesday that higher inflation might turn more persistent would surprise markets — causing traders to price in a sooner-than-expected rate hike, while flattening the Treasury curve as stocks sell off, he said via phone Tuesday. Meanwhile, Fed officials also will need to “strike a balance between signaling confidence in the outlook and more downside risks than when they last met in June.”

Investors are largely focused on the details of the Fed’s thinking on reducing its $120 billion in monthly bond purchases, though they aren’t likely to get much until the minutes of the July 27-28 meeting come out in three weeks. That leaves Powell’s views on inflation as the biggest risk to markets, following the Fed’s surprisingly hawkish pivot last month, Garretson said.

“The market is looking for him to quell some of the fears around the Fed’s hawkish tone since its June meeting,” he said. “Acknowledging rising inflation pressures would surprise markets, if anything” — and likely lead to a knee-jerk reaction similar to what followed after the Fed’s June 16 decision, when policy makers penciled in two rate hikes for 2023. Stocks fell and the 2-year yield popped higher.

Read: Fed, alert to risks of higher inflation, now sees two interest rate hikes in 2023

Longer-end yields have fallen since the Fed’s June decision, a reflection of what Garretson says is heightened uncertainty around the U.S. growth outlook combined with risks of a policy misstep by the Fed. His base-case view is that the 10-year yield can still move back up to 1.75% by year-end as long as the Fed, with an eye on inflation being transitory, “walks back some of the hawkish sentiment from its June meeting” and the delta variant doesn’t drive increased hospitalizations of similar magnitude to previous waves.

“Yields overshot their fundamentals in March, by rising to as high as 1.75%, and now they’ve moved too far to the downside,” he says.

Minneapolis-based RBC Wealth Management has about $693 billion in assets under management, he says.

On Tuesday, the 10-year Treasury note TMUBMUSD10Y was hovering around a multimonth low at 1.24%, while the Nasdaq Composite Index COMP, the Dow Jones Industrial Average DJIA, and the S&P 500 index SPX, were on pace to close lower for the first time in six sessions.

Check out: Why the 10-year Treasury yield may rise from 1.2% but stay stuck in a range as growth peaks, says Western Asset

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