The Fed kept policy rates unchanged with the fed funds target rate at a range of zero to 0.25 percent. The Fed kept its language for keeping the target low for some time. The FOMC meeting statement also gave a modest upgrade on the economy.
"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
It was not dramatic, but the Fed again has upgraded its view of the economy-notably that the labor market is not worsening as much as it has. The Fed expects economic activity to remain weak "for a time."
"Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating."
Nonetheless, the Fed sees the economy as weak, though growing. Housing is expanding at a moderate rate but is constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit.
"Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability."
Despite market concerns about this week's PPI report, the Fed only minimally addressed inflation concerns, leaving commentary little changed from the last FOMC.
"With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time."
Apparently, the Fed sees the latest inflation numbers as blips-especially since the core CPI for November came in flat-though the Fed offered no comments on this. The FOMC would have reviewed this morning's CPI report prior to voting on the statement.
The FOMC did not change its plans for ending its balance sheet expansion by the end of the first quarter of 2010. But it did remind markets of the existing plan.
"To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010."
Overall, the Fed has left monetary policy unchanged. Balance sheet expansion ends by the first quarter of 2010. The remaining question is when the unwinding begins. The Fed has not addressed that question officially outside of the language that the fed funds rate will remain low for an extended period. But the balance sheet could and likely will start shrinking sooner.