I have written masses about the upcoming FOMC meeting, the upshot of which is that a small taper is likely on Wednesday, but not guaranteed because of uncertainty about the growth outlook (and the prospect of an imminent budget crisis). What I want to do here is proceed on the assumption that the Fed tapers and discuss how it might do so. NB: this is analysis based on insight into how the Fed works. If someone had told me exactly what was going to happen it would be on the front page of the paper.
(A) Designing a taper
The first thing to note is that the FOMC did the hard part in June when it set out a tapering scenario that would see asset purchases end in the summer of 2014 with an unemployment rate of about 7 per cent. That scenario explains why there is uncertainty about tapering in September: with the main parameters already decided, the details of September’s decision do not matter that much, so if individual FOMC officials are passionate about a particular point they may be able to influence the outcome. Read more