Highlights
As expected, after the close of the two-day FOMC meeting, the Fed announced no change in the fed funds target which remained at a range of zero to 0.25 percent. However, the Fed reiterated that the fed funds rate will remain low for an "extended period." The Fed went into some detail about its plans for its balance sheet and they are consistent with earlier announcements about the extent of expansion. The Fed is hinting that unwinding may begin shortly after October but was vague enough to keep options open. Also, the FOMC indirectly suggested that the recession is ending. Instead of noting that the "pace of economic contraction is slowing" as last time, the Fed stated that "economic activity is leveling out." This is an upgrade for the economy. Nonetheless, "economic activity is likely to remain weak for a time."

The Fed seems to be a little more aware of on-going problems in the economy-especially for the consumer sector-than many.

"Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales."

Basically, the Fed is not counting on getting much out of the consumer sector for a while. But FOMC members are hinting that inventory rebuilding may be helping manufacturing soon. As recently, the Fed sees current monetary policy and fiscal stimulus to result in a gradual resumption of sustainable economic growth with price stability.

Inflation hawks should be happy that the Fed is starting to show its hand on when it will start pulling back on balance sheet expansion. The Fed will continue to buy more securities but expansion of the Fed's balance sheet may end soon.

"As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October."

The Fed is keeping its options open on further quantitative easing but this specific announcement more likely than not indicates that the Fed will soon start unwinding its balance sheet. This does not mean the Fed will be sharply boosting the fed funds rate any time soon. But instead of saying that fed funds will remain near zero, the Fed said "conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." This does not rule out very, very incremental increases in coming months-which would help soothe the inflation hawks.

Overall, the FOMC statement was largely as expected. There was little market reaction initially but equities eased somewhat later.

Market Consensus Before Announcement
The FOMC announcement for the August 11-12 FOMC policy meeting is expected to leave the fed funds target unchanged at a range of 0.0 to 0.25 percent. Markets, however, will be looking for any commentary on improvement in the economy and on timing for unwinding the Fed's balance sheet.

2009 Release Schedule

Released On: 1/28 3/18 4/29 6/24 8/12 9/23 11/4 12/16