FOMC Stays the Course

• As was widely expected by the markets, the FOMC kept the fed funds rate unchanged at the range of 0.00% to 0.25%, and reiterated its commitment to keeping rates "exceptionally low" for an "extended period".
• The economic assessment was slightly more upbeat, with the Fed noting that the economy continues to "strengthen" and labour market conditions are "stabilizing."
• Kansas City Fed President Hoenig maintained his dissention to the majority decision.
• There is the faintest mention of an exit strategy, with the Fed indicating that it will "employ its policy tools as necessary."

As was widely expected by us (and to a lesser extent by the markets) the Fed kept the wording and tone of its interest rate decision statement largely unchanged, and maintained its commitment to keeping rates "exceptionally low" for an "extended period". The fed funds rate was also left unchanged. The overall tone of the statement was as dovish as the prior one - reaffirming our bias for the Fed to keeps rate unchanged until Q1 2011 - though the continued dissention by Kansas City Fed President Hoenig suggests that this position is not unanimous among Committee members.

With the benign inflation backdrop, the inflation assessments were left virtually unchanged, with the Fed reiterating that it expects the substantial level of resource slack to continue to "restrain cost pressures and longer-term inflation expectations" with inflation expected to remain "subdued for some time."

The economic assessment, however, was strengthened somewhat, with the Fed noting that "economic activity has continued to strengthen and that the labor market is stabilizing." The labour market reference is a slightly more upbeat assessment than in the previous statement, which noted that "the deterioration in the labour market is abating." The Fed also noted that business spending on equipment and software has risen significantly, compared to its previous reference that spending is "picking up." Consistent with the recent moderation in the housing market, the Fed noted that "investment in non-residential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls."

The other aspects of the communiqué were left largely intact, though the Fed noted that "the Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability." This reference is slightly stronger than in previous statement and is the clearest reference so far, albeit a very faint one, to the Fed’s recently outlined approach to exiting the current stimulative monetary environment.

All things considered, we come away from this statement thinking that the Fed is clearly in a wait-and-see mode, confident that the monetary policy actions taken so far will be sufficient to support the ongoing economic recovery. However, there is every indication in this statement that the Fed will likely continue to maintain a cautious posture to monetary policy, particularly given the very fragile nature of the recovery. As such, we continue to maintain our bias for the Fed to keep the policy rate unchanged until early 2011, though they are likely to being draining reserves from the system in advance of the first rate hike.

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.