With a 2 minute early release of the statement, the Fed left policy rates unchanged today and also left guidance unchanged. Basically, there were no policy changes. Little changed except a downgrade to the economy. The fed funds target rate remains at a range of 0 to 0.25 percent and the Fed stated that rates are expected to remain exceptionally low through 2014. And Operation Twist continues through the end of this year.
Not surprisingly, the Fed acknowledged that the economy is not doing great-but did not use any language suggesting that the economy is dramatically weakening.
"Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated."
And the Fed indicated that inflation is easing. Importantly, there was no mention of deflation-which would suggest future policy action.
"Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable."
Surprisingly, the only major risk mentioned to the economy was implicitly Europe and slower growth in Asia.
"Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook."
There was no mention of the fiscal cliff problem but we may see more on that in the FOMC minutes.
The vote for the statement was 11-1 with Jeffrey Lacker dissenting, who preferred to leave out the time period reference for guidance.
Overall, the Fed is on hold. The Fed has set in motion Operation Twist to extend beyond the presidential election. Without further substantial weakening in the economy, the Fed likely will stay on hold until at least December.
Market Consensus before announcement
The FOMC announcement at 2:15 p.m. ET for the July 31-August 1 FOMC policy meeting is expected to leave policy rates unchanged. However, the key issue is whether the recovery has slowed enough to motivate the Fed to engage in additional policy easing. Already, the second of Operation Twist extends through December and FOMC members likely had hoped that put new initiatives off the table until after the presidential election. At a minimum, the statement likely will be more shrill about the dangers of the pending fiscal cliff.