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Fed expectations: Will they stay or will they slow?

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Investors searching for clarity this week from Fed officials on the timeline of the winding down of U.S. monetary stimulus shouldn't hold their breath, said Bank of America Merrill Lynch (BofAML).

According to a report from the bank, the Federal Open Market Committee (FOMC), which meets later on Tuesday on monetary policy and will announce a decision on Wednesday, is yet to make up its mind on when to pull back the $85 billion a month bond-buying program.

"We believe the FOMC is still making up its mind on tapering, and thus, will not strongly signal a September start at the July 30-31 meeting. The FOMC will likely need to lower its growth and inflation forecasts in September, which complicates the decision to taper, in our view," economist Michael S. Hanson and rates strategist Priya Misra at the bank wrote in a note published late Monday.

(Read more: Why Bernanke's 'open mouth' operations beat policy moves)

The central bank's growth forecast for 2013 stands at 2.3-2.6 percent, and its outlook for inflation at 0.8-1.2 percent.

"With the Fed likely providing an ambiguous message this month, markets may rethink whether September tapering really is a done deal," Hanson and Misra, who expect tapering to start in December, said.

Last week, Wall Street Journal Fed watcher Jon Hilsenrath wrote that the Fed would likely keep its bond buying program in place, but noted that officials could revise its forward guidance or adjust the economic thresholds required before raising the policy rate.

In December 2012, the Fed pledged to keep interest rates low until unemployment falls below 6.5 percent and inflation tops 2.5 percent. If the unemployment rate threshold was lowered, for example, this would indicate that rates would remain near zero for a longer time period.

Bank of America Merrill Lynch says the Fed will reassess the case for tapering on a meeting-by-meeting basis, consistent with a data dependent approach.

(Read more: Changes to Fed 'forward guidance' could bring volatility back)

"This could mean not only a later start to tapering, but a bit of a surprise when they finally move," they said.

"There is no press conference or forecast update at this meeting. If, as we expect, the FOMC makes relatively few changes to its statement - the language already clearly indicates the conditional nature of policy - then there is a risk that markets will see that as dovish," they added.

Taper, when?

The bank expects the Fed to begin scaling back its monetary stimulus in December, given recent weakness in some economic indicators, including June retail sales data and slowing momentum in the housing sector.

But if the central bank were to begin tapering as soon as September, it would likely communicate this through updated language in the third or fourth paragraph of the statement, BofAML said.

(Read more: Too early to tell when tapering will start)

"They could note, for example, that in light of the cumulative improvement in the labor market outlook since September, the Committee stands ready to gradually reduce the pace of purchases," Hanson and Misra said.

—By CNBC's Ansuya Harjani; Follow her on Twitter: @Ansuya_H

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