Goldman and Merrill economists on "Tapering"

From economists Jan Hatzius and Sven Jari Stehn of Goldman Sachs:

• Fed officials will review three key pieces of information next week: (1) economic activity and labor market indicators that have been modestly encouraging, (2) a stabilization in core inflation at levels well below the 2% target, and (3) a tightening of financial conditions since the last meeting, mainly because of higher long-term interest rates.

• We believe the news is consistent with a shift in the mix of monetary policy instruments away from asset purchases and toward forward guidance. ...

• Regarding the asset purchase program, we expect a tapering of $10bn, all in Treasuries, as well as confirmation from Chairman Bernanke that the committee still expects to end QE3 in mid-2014.

• Regarding the forward guidance, we expect a clarification that the 6.5% unemployment threshold is conditional on a return of inflation
emphasis added

From the Merrill Lynch economic team:

We expect the Fed to delay tapering at its September 17-18 meeting, but a “token taper” of $10 bn is also quite possible. More important, we expect a market-friendly message from the Fed, underscoring a slow, data-dependent exit.