FOMC: Steady as She Goes

• As widely expected, the FOMC kept the fed funds rate unchanged.
• The tone and text of the statement were virtually unchanged from the last time.
• The statement noted that the Fed expect inflation to remain "subdued" and the economy to remain "weak" from some time.

As widely expected by the markets, the FOMC kept the fed funds rate steady and renewed its commitment to keep rate low for an extended period of time. The tone and text of the communiqués was virtually identical to the last one, with the statement appearing to be a carbon-copy of the April 24 one.

Unlike what was expected by some market participants, there was no explicit mention of an exit strategy, though the Fed tweaked the statement to note that the Committee is "monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted." This is a curious change in wording compared to the previous statement in which the FOMC stated that the Committee "will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet." In a sense, this may be a tentative step by the Fed towards outlining an eventual exit strategy.

The Committee also kept the size and the composition of the current programs unchanged.

In terms of the economic and inflation assessments, the statement was more-or-less unchanged from the prior one, with the Fed noting that "the pace of economic contraction is slowing", and that "conditions in financial markets have generally improved in recent months." On the inflation front, the Fed noted that "resource slack is likely to dampen cost pressure", but did not repeat its concern about the "risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term", as it has done in the previous three statement.

In the end, a careful study of the statement suggests that the Fed has decided to stay the current course. Indeed, with no explicit mention of an exit strategy or an indication that the Fed will increase the size of its Treasuries purchases, the stance of the Fed appears to be unchanged. Notwithstanding, it appears that the deflationary fears that may have pervasive only a few months ago among some members may have abated.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.