U.S.: FOMC Statement Sticks to Status Quo

• The Fed kept the monetary policy stance unchanged.
• The economic assessment was somewhat more optimistic, though the Fed expects economic activity to remain weak.
• The statement made no mention of the TALF program, which we believe is an indication that the Fed is beginning to look beyond this facility.

As was widely expected by the markets, the FOMC kept the fed funds rate steady, and reaffirmed its commitment to keeping rates at "exceptionally low levels" for an "extended period." In terms of its monetary policy stance, the Fed appears to have taken a wait-and-see approach to its current framework, noting that it expects the policy actions taken to stabilise the U.S. economy so far will contribute to a "resumption of sustainable economic growth."

As we had suspected, the Fed made no change to its current quantitative easing framework, changing neither the size nor composition of its balance sheet, and instead provided an inventory of the current programs being undertaken to resuscitate the U.S. economy and ease credit conditions for businesses and households. Curiously, the Fed said that it "will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook". It is unclear whether a recent improvement in economic conditions could thus result in fewer asset purchases, or whether an increase in purchases could eventually occur as has been widely speculated. However, the statement made no mention of the TALF program, and we are inclined to interpret this as the Committee perhaps de-emphasising this program, given its less-than-stellar performance since its inception last month.

There was a slightly improved tone in the economic assessment, as the Fed stated that the economic outlook has improved modestly since the past meeting, though they indicated that economic activity is "likely to remain weak for a time". In particular, the Committee noted that there are signs that household spending may be stabilizing, though it remains "constrained by ongoing job losses, lower housing wealth, and tight credit." It also noted, however, that the tight credit conditions have been contributing to businesses cutting back on inventories, fixed investments and payroll.

The inflation outlook was unchanged, and the FOMC reiterated its concerns that "inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."

On the whole, one can interpret this statement as a status quo report card, with the Fed more-or-less regurgitating most of what it has said in its prior communiqué. However, the more upbeat economic assessment, the musing about the size of its asset purchases, and the de-emphasizing of the TALF program are noteworthy changes to an otherwise mundane statement.

TD Bank Financial Group

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