FOMC Leaves Rates Unchanged and Signals Improvement is Undergoing

The Federal Open Market Committee decided unanimously today to leave its benchmark interest rates unchanged at the current target range between 0% and 0.25% and signaled interest rates will remain at exceptionally low levels for an extended period of time, as the U.S. economy has just started to recover from the worst recession since WWII.

The FOMC explained that despite the recent improvement in economic activity, as the manufacturing, industrial, and housing sectors all started to show signs of stabilization or even an increase in activity, as the economy seems to be on its way to recover from the worst financial crisis since the Great Depression, yet challenges are still ahead and that the economy is still under pressure, though downside risks to growth seem to have diminished indeed.

The Feds signaled that rising unemployment and tightened credit conditions continue to weigh down on economic activity, as unemployment which rose in August to 9.7% will probably affect income growth negatively and accordingly consumer spending which accounts for nearly 2/3 of economic activity will remain weak.

The Feds also expected that the ongoing slack in economic growth will continue to weigh down on prices, as the FOMC believes inflation will probably remain subdued for some time, however the FOMC believes that inflation expectations were rather stable over the long term, which signals an easing tone on risks for an extended period of disinflation, which was signaled in the last meeting.

Meanwhile, the Feds confirmed that they will continue with their Treasury purchase program as planned at $300 billion, whereas the Feds signaled at their last meeting that the program will end in October this year, as they believe that markets have improved further over the past period.

Moreover, the Feds signaled that they will gradually slow down their purchases of MBS, and Agency Debt, as the Feds extended the MBS, Agency Debt purchases program until March 31st, and the Feds assured markets that they will continue to evaluate the timing and the size of asset purchases.

The Feds also signaled that they expect economic slack to ease as the economy returns gradually to growth, as the Feds believe the economy will continue to strengthen over the course of the upcoming quarters, while the Feds also signaled that activity in the housing market has increased indeed, while businesses have been cutting investments and staffing over a slower pace.

But still, the Feds believe that the economy will remain weak for a time, as consumer spending is still expected to remain subdued even though it has been stabilizing over the last period, but mounting job losses will surely affect income growth and adding to that tightened credit conditions, it seems that the economy will continue to under perform its long term growth potentials, even if improvement is undergoing.

Stock markets rose in the United States after the FOMC decision, as the statement was rather optimistic and signaled the world’s largest economy is on its way to recovery, as the DJIA rose so far 69.30 points or 0.70% and was last traded at 9899.17, while the S&P 500 index rose 6.57 points or 0.61% and was last traded at 1078.23, and the NASDAQ Composite index rise 18.39 points or 0.86% and was last traded at 2164.69, data as of 14:43 New York time.