FOMC Retained The 'Extended Period' Language. Hoeing The Only Dissenter

As we and the market anticipated, the FOMC left its policy rate unchanged at 0-0.25% and retained the pledge to keep interest rates at current low level for an 'extended period'. Economic assessment changed little from January despite modest improvement from the job market. We believe employment situation remains the core factor for the Fed to consider taking away the 'extended period' language.

The Fed's outlook on economic development was largely unchanged from January's meeting. The Committee continued to believe 'with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time'.

There were a few changes in the Fed's description on the economy, though. As mentioned in the March statement, economic activity has continued to strengthen and that the labor market is 'stabilizing' although household spending was affected by 'high unemployment'. In January, policymakers said the 'deterioration in the labor market is abating' and focused on 'weak labor market'. The Fed has also turned more upbeat on business investment as spending on equipment and software 'has risen significantly', rather than just 'picking up' in January.

At the same time, the Fed addressed worries over the property market as 'investment in nonresidential structures is declining, housing starts have been flat at a depressed level'. Disappointing housing market data probably sent a signal to policymakers. New home sales slumped -11% to 0.31M units in January. This is the worst reading on record and signals vulnerability in the US housing market. Poor performance was followed by existing home sales surprisingly dropped, by -7.2%, in January from a month ago. The annualized sales, at 5.05M units, were the lowest level since June 2009.

There were not much news on the exit program but it's noted in the statement that the purchase of $1.25 trillion of agency MBS and $175B of agency debt are 'nearing completion and the remaining transactions will be executed by the end of this month. This suggests the Fed is not likely to extend the program. That said, the Committee retained flexibility make changes by saying it would 'employ its tools as necessary to promote economic recovery and price stability'.

Thomas Hoenig, Kansas Fed President, was again the only member voting against the policy action as he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.

Currently, the market has been focusing on the timing for the Fed to remove the 'extended period' language. We expect it to take place in the second quarter but the actual timing heavily depends on the pace of recovery in the job market