NEW YORK (Reuters) - The Federal Reserve on Wednesday held monetary policy steady and said the U.S. economic recession was easing, as it signaled its worries over a possible troubling downward spiral in prices were easing.
KEY POINTS: * Concluding a two-day meeting, the central bank also said it had decided to hold overnight interest rates in a zero to 0.25 percent range — the level reached in December — and repeated that they would likely stay unusually low for some time. * With the benchmark interbank lending rate virtually at zero, the Fed has focused on driving down other borrowing costs by buying mortgage-related debt and U.S. government bonds. * “Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. * In the statement, the Fed added that it “will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.”
LINDA DUESSEL, EQUITY MARKET STRATEGIST, FEDERATED INVESTORS, PITTSBURGH:
“It was totally as expected. The market doesn’t seem to have reacted that much. Everybody pretty much knew that for sure they wouldn’t raise rates anytime soon and they wouldn’t do anything to withdraw liquidity.
“The inflation question has been something that has been bothering people in the marketplace and what they say here that they expected it to remain subdued for some time. In their last statement they didn’t even say ‘for some time.’”
CHARLES ROTBLUT, SENIOR MARKET ANALYST, ZACKS INVESTMENT RESEARCH, CHICAGO:
“None of it actually surprised me. I know a lot of traders were looking for clear signs of either an exit strategy for the debt repurchase program or just a sign that the Fed was considering interest rate hikes in the future. And neither of that was provided. But I think, given what we’re seeing now, and the current state of the economy, I think the Fed did the right thing by trying to keep yields down.
“I think the big thing is that although economic conditions have improved over past several months, it’s important to understand that the economy is by no means out of the woods.
“I think the goal of their statement was to keep mortgage rates from rising too much. Looking at new home sales figures, which were flat the last four months, it was a good instinct for the Fed to try to keep mortgage rates down.
“Right now, the market is trending down. It looks like we’ll potentially close with a loss for the day. But the week ahead will see earnings coming out that will likely have an impact, like Nike for consumers and Micron for semiconductors.”
ROBERT CALLAHAN, MANAGING DIRECTOR, NEWPORT VALUE PARTNERS, NEW YORK:
“The Fed is trying to reflate this economy, lending banks money at a rate as close to zero as the banks in turn can lend it out at higher rates. They’re trying to resurrect the banks. (As far as dropping the reference in the last FOMC statement to ‘some risk that inflation could persist for a time below rates that best foster economic growth,’) they’re reacting to the fact that oil has gone from $40 a barrel to almost $70 a barrel.
“Secondly, notwithstanding yesterday’s auction, 10-year yields have been rising... rates have to go up to protect the dollar or it all comes tumbling down.”
STEVE VAN ORDER, FIXED INCOME STRATEGIST, CALVERT ASSET MANAGEMENT, BETHESDA, MARYLAND:
“It’s essentially the same statement as the last one. They expect inflation to stay subdued. This language reasserts that. They seems to say they are not as concerned with the worst case scenario on deflation.
“If you don’t buy that argument, you sell the long bond. The statement is a touch more dovish with the output gap argument that counter-balances what they say about inflation. It implies the market is pricing in a Fed rate hike too soon.
“The nervousness of the seven-year note auction is coming up, and we are not quite sure how to read the auctions now with the indirect bids.”
BILL O’NEILL, MANAGING PARTNER, LOGIC ADVISORS, UPPER SADDLE RIVER, NEW JERSEY:
“I would say neutral to maybe slightly positive (to gold), only in a sense that the Fed eliminated the deflation threat, so that was no longer an issue.
“This was a Fed statement that really has little surprise and little change. The markets are going to function on the factors that they have been focusing on. In the case of copper, it’s certainly going to be China, as well as demand outside of China and also the currencies.”
KIM RUPERT, MANAGING DIRECTOR, GLOBAL FIXED INCOME ANALYSIS, ACTION ECONOMICS LLC, SAN FRANCISCO:
“I think everybody was looking for something more dovish. But it’s also the case, in our view, that perhaps the market is selling off a bit by the lack of an exit strategy, or that this is sort of a bond vigilante’s revenge that the Fed isn’t looking to sop up a lot of the excess liquidity in the market any time soon.”
CARL BIRKELBACH, CHAIRMAN AND CEO OF BIRKELBACH INVESTMENT SECURITIES IN CHICAGO:
“The Treasury is going to have to keep coming to the marketplace for about $2 trillion. I think all these sales have gone well, but there is a high probability that along the line we’ll be looking at higher interest rates. There’s too much paper to sell to investors.
“We have an economy on steroids at this point, with the TARP and the stimulus package. We’re reaching a point where the Fed isn’t exactly worried about inflation, though commodity prices seem to still be going up despite the flat economy.
“They’re getting themselves stuck a little. We’ve avoided another Great Depression, but on the other hand commodities are going up while the economy is flattening out. We used to have a term for that — stagflation. What we’re moving into is a great sideways period. It’s not a v-shaped bottom, it’s an elongated upward battle. We continue to have rising unemployment and housing prices falling. The consumer is over 70 percent of the economy now and the consumer doesn’t look like it’s reviving. It appears we’re moving sideways, maybe tilted upward a little.
“What the Fed has a problem with is a flat economy and higher energy prices. That may be something from China or speculators. They’re caught, and the market is reacting negatively because there’s no much they can do about this.”
BRUCE MCCAIN, CHIEF INVESTMENT STRATEGIST, KEY PRIVATE BANK, CLEVELAND:
“The Fed stood about as middle a ground as they could at this point. Hopefully that will reassure those who were worried about this economy, both those who were worried about the economy being stalled and also those who were worried about the economy tilting too far and inflation being a problem. They didn’t expand any amount for Treasury purchases or change their timeline. They held their cards as close to their chest as they could.
“It’s probably for the best that the Fed just back off and watch. We’re seeing signs of recovery in the economy. The economy is coming around and moving in their direction. Too strong an action on their parts would unnerve the market about generating inflation. A hands-off approach is the appropriate action on their part.
“The market impact will be fairly muted. The equities market is backing off a little bit after being up substantially today because of the good economic news at the open. It’s in corrective mode. Investors will go back to thinking about economic data and forget about the Fed.”