Fed Leaves Policy Rate Steady, Presents Slightly More Upbeat Assessment of Economic Outlook

The FOMC's statement offered a slightly more upbeat assessment of the economy. While their comments still echoed their April assessment that the outlook for economy has improved, today's statement added more emphatically that the "pace of contraction is slowing" rather than "appears to be somewhat slower." This assessment didn't surprise anyone nor did their decision not to adjust the target for the Fed Funds rate, which will remain in the current 0 to 0.25% range.

While the tone of the statement was firmer with respect to the outlook for the economy, the Fed acknowledged that the economy will be weak "for a time" and did not provide a more definitive timeline for the policy rate but reiterated that the policy stance would be maintained "for an extended period." On their credit and quantitative easing initiatives, the Fed made no changes. On the inflation outlook, the Fed still looks for inflation to "remain subdued for some time" but did not reiterate concerns about significant downside risks for prices as they did in April.

Once again the FOMC members stated that they will "evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets." Also in the same vein as the April statement, the FOMC said it "is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted."

Interest rates along the yield curve have drifted higher in recent weeks, which likely is of concern to policymakers because the increases pose a threat to the tentative signs that the economy is stabilizing. For now, the Fed appears content to allow its current game plan to address this deterioration stand having provided the market with a loose promise to keep rates low — they did not provide a detailed time table like the Bank of Canada — as well as continuing to purchase agency debt, mortgage-backed securities and government bonds. The statement implied that these policies were having an impact as financial markets conditions were deemed to "have generally improved in recent months." We look for the combination of low interest rates and the flow of government spending to yield results later this year with the economy forecast to emerge from the current recession and build momentum in 2010.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.