• Fed funds rate remained at 0-0.25%
  • Outlook for the labor market and business spending improved
  • FOMC will follow the previously announced schedule to winddown remaining liquidity support programs

Changes to the statement from today’s FOMC meeting reflect a more positive economic outlook. One of the most significant changes was the view of the labor market. The statement stated that, “the labor market is stabilizing,” rather than, “deterioration in the labor market is abating.” Furthermore, in regards to constraints on consumer spending, the wording was change to, “constrained by high unemployment,” rather than, “constrained by a weak labor market.” These modifications could imply that members expect the labor market to start adding jobs in upcoming months.

The second positive change was that business spending on equipment and software was described as having “risen significantly” instead of “appears to be picking-up,” which indicates that the Fed could expect nonresidential investment to expand further. Nevertheless, the statement continued to highlight the risks that high unemployment, modest income growth, lower housing wealth and tight credit could constrain consumer spending. Furthermore, it added the phrase, “housing starts have been flat at a depressed level,” which could indicate that the FOMC is concerned about the strength of the recovery in residential investment.

While the FOMC modified the message concerning the economic outlook, the language in regards to inflation and monetary policy remained the same. The interest rate was maintained at 0-0.25% with the language that “economic conditions… are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Furthermore, the committee is continuing to follow its previously laid-out plan to wind down support for mortgage lending and the housing markets by completing purchases of agency MBS and agency debt by the end of March. As announced in the previous meeting, the Term Asset-Backed Securities Loan Facility is still scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.

The committee continues to believe that inflation will remain “subdued for some time,” and will not pose a challenge for monetary policy. This outlook is in line with our expectation of low but positive inflation in 2010.

Bottom-line: In line with our expectations, the FOMC maintained the current “extended period” language in relation to the target interest rate. With the ongoing improvement in the committee’s economic outlook, it is likely that members are debating when and how to modify the language and implement the previously communicated tools to reduce excess reserves. Nevertheless, given the level of economic slack, the remaining challenges facing the recovery and few inflationary pressures, we continue to anticipate low interest rates for a prolonged period of time.