GOLDMAN: Here Are 3 Reasons Why The Fed Won't Taper Next Week

A slew of strong better-than-expected economic data has economists increasing the odds that the Federal Reserve will announce the tapering its $85 billion quantitative easing program at the conclusion of its FOMC meeting on Wednesday December 18.

"It's still a close call, but chances are now above 50 percent that the Federal Reserve will modestly reduce its asset purchases later this month," said Potomac Research Group's Greg Valliere who was communicating the analysis of former Fed Vice Chair Don Kohn. "There's a 60-40 chance that the FOMC will decide on Dec. 18 to begin tapering."

However, a December tapering announcement is not the consensus. Most economists don't expect a tapering announcement until January or March.

Goldman Sachs' David Mericle explains three reasons why in a new 9-page note to clients.

1. Economic Data: "...the data since October is mixed at best. The strongest argument in favor is the improvement in the trend rate of payroll growth to the 200k level. However, we expect that Fed officials will also put considerable weight on inflation, which has fallen further in recent months."
2. Communication: "...we continue to expect that tapering will be offset by a strengthening of the forward guidance, but we doubt the FOMC is ready to take this step. While some eventual strengthening or clarifying of the forward guidance is now a consensus expectation, the October minutes and recent Fed commentary suggest little agreement on what form this should take."
3. Expectations: "...while consensus expectations now place greater probability on a December taper, it remains a minority view. We suspect that this makes a move less likely, as Fed officials will be reluctant to deliver a hawkish surprise that could tighten financial conditions and raise doubts about their commitment to the inflation target."

Mericle expects tapering to begin in March, "with January possible as well."

As for the December FOMC meeting: "We expect modest changes to the economic forecasts. In light of recent data, participants will likely mark down their projections of inflation and the unemployment rate and mark up their growth projections slightly," wrote Mericle.

Notable economists forecasting a tapering announcement include Bank of Tokyo-Mitsubishi's Chris Rupkey and Deutsche Bank's Joe LaVorgna.