INSTANT VIEW: Optimistic Fed statement boosts markets

NEW YORK (Reuters) - The Federal Reserve on Wednesday said that the U.S. economy was in recovery after a severe downturn and decided to slow purchases of mortgage debt to extend that program's life until the end of next March.

KEY POINTS: * The Federal Reserve on Wednesday said that the U.S. economy was in recovery after a severe downturn and decided to slow purchases of mortgage debt to extend that program's life until the end of next March. * The Fed, as widely expected, held overnight lending rates at close to zero percent and repeated its intention to keep rates exceptionally low for an extended period. * "Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn," the Fed said a statement. * The Fed said that it would gradually slow the pace of its purchases of mortgage-related debt in order to promote a smooth transition in markets, but reiterated it would keep its options open. * The Fed doubled the size of its balance sheet to around $2 trillion as it flooded financial markets with money during the crisis last year. It has maintained this support through a campaign to buy $300 billion of longer-dated U.S. government bonds and $1.45 trillion of mortgage-related debt in an effort to keep lending rates low.

COMMENTS:

COLIN LUNDGREN, HEAD OF INSTITUTIONAL FIXED INCOME, RIVERSOURCE INVESTMENTS, MINNEAPOLIS:

"They are just trying to wean the market from massive government stimulus that has come in several different forms. Treasury purchases have come and go, and we are seeing. It's giving market a bit more time. Eventually, the fed funds rate will un-anchor.

"But the message is still the same with fed funds rate low for an extended period of time. There is no threat from inflation any time soon. That part is pretty anti-climatic."

"The excitement is looking for clues to the end of quantitative easing program. We are not going to change the amount but we are changing the timetable so the market can take it in stride. The Fed is probably okay with the financial market's response to it."

"I don't see a reason for the benchmark 10-year yield to break out of the 3.25 percent to 3.75 percent anytime soon. In terms of risk assets, they had a heck of a run. This is not the reason why investors will stop them from buying the riskier parts of the market."

"It seems like inflation will be a few years away. The Fed can be slow in raising its short-term rate target. It could keep short-term rates anchored and long-term rates a bit lower. But don't expect a rally in Treasuries."

WILLIAM O'DONNELL, RBS SECURITIES, HEAD OF U.S. TREASURY STRATEGY, RBS SECURITIES, STAMFORD, CONNECTICUT:

"I guess people were looking for something a little bit more hawkish.

"I think that's why the Treasury market reversed from down on the day to up on the day.

"The major change...was that they chose to make a decision on the agency and agency MBS buy-back plan. I think the market may have thought that there was a risk that they wouldn't go to the full limit of $1.45 trillion for those two programs and they decided to do that."

KEITH HEMBRE, CHIEF ECONOMIST AT FIRST AMERICAN FUNDS IN MINNEAPOLIS:

"The bottom line is that the Fed is continuing to provide very accommodative policy.

"The fact that they continue to indicate rates are likely to remain low for an extended period of time suggests they are not contemplating tightening policy any time soon and all other things being equal that should be favorable for the markets.

DAN COOK, SENIOR MARKET ANALYST AT IG MARKETS, CHICAGO:

"It was pretty much what was expected. With regard to the mortgage backed securities it's similar to what they did with the treasuries. No real changes, it's still going to be the same amount.

We've seen the euro getting quite a bit stronger against the dollar. I don't think that statement will change that direction.

"This continues the theory of green shoots, which should still lead to risk-taking and that should definitely benefit the euro as well as the pound in the short term.

"We didn't get anything from them today that will change direction, so I don't see any reason why the euro doesn't keep going in the same direction it's been in for the last little while here and that's continued euro strength.

JAMES STEEL, CHIEF COMMODITIES ANALYST, HSBC, NEW YORK:

"If the dollar remains on the defensive because of the low interest rate, then it is certainly supportive to gold.

"The Fed says that the U.S. recovery is underway, and that is generally commodities friendly."