• The Fed maintained the federal funds rate at 0-0.25%
  • Improvement was cited in the labor market and consumer spending
  • No change to the inflation outlook or current monetary policy
The FOMC believes that the economy strengthened in the intermeeting period, which is in line with outlooks described by the regional Presidents in recent speeches. While the previous statement described the labor market as “stabilizing,” today’s release highlighted that it is “beginning to improve.” The statement balanced the optimism by saying,  “employers remain reluctant to add to payrolls,” indicating that members expect the
labor market recovery to be slow.

Another improvement in the Fed outlook is household spending. The statement reported that, “growth in household spending picked up,” whereas the previous report claimed that it was “expanding at a moderate rate.” Nevertheless, it could remain constrained by “high unemployment, modest income growth, lower housing wealth and tight credit markets.”

Lastly, the statement acknowledged that housing starts have “edged up, but remain at a depressed level” whereas the previous statement described them as “flat.” The language change indicates an improved outlook for residential investment, but it is not likely going to be a driver of economic growth.

While the FOMC’s outlook acknowledges progress in the economic recovery, the committee does not see any inflationary pressures. The statement’s language remained consistent with the previous two meetings by stating that, “with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.” Accordingly, the federal funds rate was maintained at 0-0.25% as was the “exceptionally low… for an extended period,” language. In addition, there were no changes to monetary policy. The last of the special liquidity facilities, the Term Asset-Backed Securities Loan Facility, will close on June 30 as scheduled.

As in the previous three meetings, Thomas Hoenig dissented with the belief that the exceptionally low levels of the federal funds rate for an extended period was no longer warranted. In a previous speech, he expressed his belief that gradually raising rates up to 1% would be in line with current strategy and would mitigate the risk of longer-run imbalances.

Bottom-line: In line with expectations, the FOMC did not make any significant changes to the statement or current monetary policy. Economic data is progressively improving, which supports the FOMC’s average forecast of 3.2% growth in 2010. Nevertheless, the committee has yet to make changes to interest rates due to subdued inflation trends and
economic slack. Members will likely look for signs of a sustained private led recovery, which could include an acceleration of job creation in the private sector and a moderation of the unemployment rate, before it makes a change to its communication.