Fed maintains status quo

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By Palash R. Ghosh | June 24, 2010 8:39 AM EST

As expected, the Federal Reserve kept its benchmark Fed Funds rate at near-zero, citing that low inflationary trends, a still-weak job market and a generally struggling economy will compel the central bank to keep “exceptionally low levels... for an extended period.”

While it reiterated its "extended period" language in its statement, Action Economic (AE) reported, The Fed did change the opening sentence, as expected, stating that the "economic recovery is proceeding."
But the Fed also said the labor market is improving gradually, compared to "beginning to improve," in April.
Other than those, AE indicated, there weren't any major changes in the statement. For example, though household spending is "increasing," it is still being constrained by "high unemployment, modest income growth, lower housing wealth, and tight credit."

AE also indicated that The Fed noted housing starts remain at "depressed levels" and financial conditions have become "less supportive, largely reflecting developments abroad." The Fed remains sanguine on inflation.

As expected, Thomas M. Hoenig, a Fed hawk, again dissented against the statement, AE added.

“The weak job and housing markets have been and will likely continue to be concerns keep Fed policy accommodative,” said Alan Gayle, senior investment strategist for RidgeWorth Investments. “Typically the Fed emphasizes domestic factors when setting domestic monetary policy, so any mention of EuroZone debt problems or budgetary shifts [would have been] a noteworthy development in the FOMC minutes.]

Paul Ashworth, senior US economist at Capital Economics found the statement “ marginally more dovish” and that it is “is likely to push market expectations even more closely into line with our long-held view that the fed funds rate will remain at near zero until 2012.”

At the start of this year, he noted, the fed funds futures market had the first rate hikes priced in for the second half of 2010 and by the end of 2011 rates were expected to climb to 2.4%.

”Now the first rate hike isn't priced in until mid-2011 and rates are expected to end 2011 at only 0.8%,” he said.

Interestingly, The Fed statement made no explicit mention of China's revaluation of the Yuan, nor the budget deficit crisis in the Eurozone, although the rather vague phrase “developments abroad”was used.

Sean Snaith, an economist at The University of Central Florida noted prior to the release of the statement that “I will be interested to see if a mention of the Yuan makes it into the statement. I think it will be discussed but may not be included in the statement.”

In addition, the Fed dropped no hints about when they might start to consider tightening. Many economists believe the central bank will keep rates at historic lows for at least the remainder of this year, and perhaps well into next year.
Indeed, as the unemployment rate hovers around the 10% level, and the housing market remains crippled, Ben Bernanke perhaps wants to tread very carefully by not jeopardizing what has become an extremely fragile recovery.

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