* FOMC keeps Fed fund target rate at 0 to 0.25% and still expects that conditions warrant low rates for extended period.
* QE-2 will be completed by end June, but QE-3 is unlikely, as focus shifts to regular review of size and composition of its securities holdings.
* FOMC is more confident on the recovery, but recognizes higher inflation which is however considered as transitory.
* Bernanke did his utmost best to avoid markets becoming nervous about the exit.
* Markets consider statement and comments of Bernanke as green light for more risky trades: Equities up, dollar down, gold & oil up and curve steeper.
As expected, the FOMC kept its policy largely unchanged. Some subtle changes in the wordings on the economy and inflation together with a hint that a new programme of asset purchases is unlikely show that the Fed is very slowly, at a snake’s pace, preparing for the exit of its very accommodative policy stance. The statement however remained silent on the timing of such a policy change and Bernanke’s remarks at the press conference suggest that an exit from the very accommodative policy is not around the corner. We first analyse the statement and continue afterwards with some issues Bernanke tackled.
Please find full version of the analysis in the Economy / Analyses section.
Conclusion:
The FOMC seems in no hurry to start tightening its policy. They will stop QE-2 by the end of June and keep at that time the balance sheet unchanged by reinvesting the proceeds of the assets purchases. Stopping the latter would be a first tightening step. The FOMC will decide on it by looking at the outlook for growth and inflation (+inflation expectations). (2234 GBp, 0,40%) step will be the dropping of the FOMC conditional promise to keep rates very low for an extended period of time. Extending means a couple of meetings. While we were expecting a first rate hike by the end of 2011, that currently seems a bit early, but we don’t feel the need to change it for now.