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USA: FOMC holds rate policy steady at 0 to 0.25%, prepared to buy treasuries if warranted, USD firms

Thu, Jan 29 2009, 14:11 GMT
by Michael J. Malpede

Easy Forex


The Fed elected to keep its target range unchanged at 0 to 0.25%. The Fed anticipates that economic conditions will warrant exceptionally low Fed funds rates for some time. The Fed says that the economy has weakened further since they met in December noting declining industrial production, housing starts, employment and businesses cutting back spending. The Fed said global demand has slowed significantly. The Fed expects gradual economic recovery later this year but notes significant downside risks to the economy. In light of the decline in energy prices and commodities the Fed sees inflation pressures subdued. The Fed will continue to purchase large amounts of agency debt and mortgage-backed securities. The Fed said that it is prepared to buy long-term treasuries if circumstances indicate that such purchases would be effective in improving conditions in credit markets. The fact that the Fed did not announce an immediate plan to buy treasuries may be seen as a disappointment. The trade will monitor how equities react to the Fed's statement. USD firmed after the Fed policy announcement as the Fed failed to offer any new or unconventional measures to boost the economy and credit markets. The fact that the Fed will not immediately buy treasuries may inject fresh risk aversion supporting USD. The Fed may ultimately buy treasuries and this could improve confidence in the US bond market and encourage investment flows to the USD. Fed policy action is only part of the equation as focus shifts to the expected passage of a new US fiscal stimulus plan.

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