Fed Leaves Rates Unchanged

The U.S. Federal Reserve left the Fed Funds rate unchanged at 2 percent as widely expected by the market. The Federal Reserve believes that growth risks are now fairly balanced with inflation concerns and the substantial easing of monetary policy to date should help to rescue the U.S. economy from technical recession. Even so, the Federal Open Market Committee admits that credit conditions remain tight and the ongoing housing contraction is likely to weigh on economic growth over the next few quarters. The next FOMC meeting is on September 16 and there is a 69.5 percent probability the Federal Reserve will leave rates unchanged, according to Fed Funds futures.

Like we predicted in our “Forecast for the US Dollar Ahead of Today’s Fed Decision”, the FOMC statement was less hawkish than expected and the U.S. dollar is weaker in the minutes following the rate decision. Indeed, over the last few days the U.S. dollar had been rallying against the world’s most liquid currencies on speculation the Federal Reserve could open the door for a series of rate hikes in the months ahead. In fact, traders were expecting the Federal Reserve to increase rates by 75 bps over the next eight FOMC meetings, according to overnight index swaps on the Fed Funds rate. However, today’s FOMC statement was clearly a disappointment for many market players and the recent strength in the U.S. dollar may easily evaporate in a wave of profit taking. You can read the full FOMC statement below.[B]

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.
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Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

[B]Written by Antonio Sousa, Chief Strategist
Questions? Comments? E-mail: <[email protected]>[/B]