Instant View: Fed holds rates steady; more upbeat on economy

NEW YORK (BestGrowthStock) – The U.S. Federal Reserve on Wednesday left interest rates near zero and renewed a promise to keep them low for an “extended period,” though it sounded more upbeat on the economic recovery and jobs.

KEY POINTS: * The U.S. central bank said consumer and business spending were picking up steam. * “Economic activity has continued to strengthen and… the labor market is beginning to improve,” the central bank said. * The description of the job market was somewhat brighter than in March, when the Fed said only that employment was stabilizing. It repeated that employers remained reluctant to add to payrolls.

COMMENTS:

HUGH JOHNSON, CHIEF INVESTMENT OFFICER, JOHNSON ILLINGTON ADVISORS, ALBANY, NEW YORK:

“There’s nothing that’s a significant surprise in this statement. They have essentially reaffirmed policy — to keep interest rates exceptionally low for an extended period of time, and have subtly upgraded their assessment of the economy.

“Although, they are careful to mention some of their concerns, such as that bank lending continues to contract. Nevertheless, both the decision and statement are not surprising.

“The fact that there’s a slight upward move in stock prices is a predictable response for their reaffirming their current stance. There’s nothing in this statement that says they’re going to change policy any time soon, and I think that is important to the markets.”

DOUG ROBERTS, CHIEF INVESTMENT STRATEGIST, CHANNEL CAPITAL RESEARCH, SHREWSBURY, NEW JERSEY:

“They are still going to remain relatively dovish on monetary policy and they said this in the statement. They are going to take a gradual course. They are kind of like withdrawing stimulus at a glacial pace.”

ERIC GREEN, CHIEF OF US RATES RESEARCH AND STRATEGY, TD SECURITIES, TORONTO:

“The FOMC decision to keep rates unchanged was accompanied by a statement that conveyed a central bank mired in the status quo. Extended period language maintained, along with subdued core inflation, and despite a modest upgrade to the employment picture, the overall tone remains very much in line with prior iterations. There was no reference to asset sales or reserve management though the minutes will provider more color there on a topic that was surely discussed at some length. For now, the Fed remains firmly fixed on being cautious on the rate front, a view nourished by their ongoing caution on the economic recovery and entrenched downtrend in core inflation.”

BURT WHITE, CHIEF INVESTMENT OFFICER, LPL FINANCIAL, BOSTON:

“The Fed effectively kicked the can down the road, what the market was anticipating.

“I don’t think the Fed is going to change its language until at least two consecutive months of jobs growth.

“Now that we’re in May, this increases the likelihood we won’t see a rate change in 2010. There’s no use in signaling raising rates until you start seeing inflationary pressures, and we’re not seeing those yet.”

JILL KING, SENIOR PORTFOLIO MANAGER, HORIZON CASH MANAGEMENT LLC, CHICAGO:

“Based on the FOMC’s continued use of ‘extended period’ language today, it seems unlikely that the Fed will raise interest rates without waiting at least one or two meetings after they remove the language. Originally, the language was believed to imply a six-month lag between removing the language and the Fed raising interest rates. Now, it appears to mean very little and opens the door for the Fed officials to raise rates at their discretion.

“Last week, the media reported that several Fed presidents support asset sales, although Chairman Bernanke doesn’t share that view. Most likely there will be no mention of asset sales in today’s comments, but we may see references to asset sales in the minutes of this week’s meeting.

“With Canada recently announcing that they will not ‘necessarily’ maintain their stance on an interest rate of 25 basis points, the possibility that Canada will raise rates in the near term appears to be a possibility. And while this may not directly impact the U.S. interest rate policy, it does signal the continuing move toward higher rates worldwide.”

TOM SOWANICK, CHIEF INVESTMENT OFFICER, OMNIVEST GROUP, PRINCETON, NEW JERSEY:

“The Fed decided to keep the ‘extended period’ once again despite their more upbeat view of the economy. They are obviously concerned about financial market stability, regulatory risk and now increased euro zone instability. It seems increasingly likely that the Fed will have only one chance to raise rates this calendar year because of the mid-term elections.”

BRUCE MCCAIN, CHIEF INVESTMENT STRATEGIST, KEY PRIVATE BANK, CLEVELAND, OHIO:

“Most striking was the acknowledgment of the improvement in the economy.

“They don’t seem to be inordinately anxious about the fears of inflationary implications.

“There is not any increasing sense of dissent within the Fed.

“One has to wonder if in light of the issues arising in Europe and the tumult there, that the Fed doesn’t feel that the exit strategy (is) a little less of a concern now than it was last week before the eruption of the European debt crisis.”

KEITH BLACKWELL, U.S. INTEREST RATE STRATEGIST, RBC CAPITAL MARKETS, NEW YORK:

“There were no really big surprises. One thing I will note is that they changed the wording on the labor market from the labor market is stabilizing to the labor market is beginning to improve.

“We’ve long held that one of the preconditions for any change in the Fed’s language around the extended period would have to be an improving labor market. This doesn’t necessarily herald a change but it does make it more likely sooner in the future.”

JOHN DOYLE, SENIOR CURRENCY STRATEGIST, TEMPUS CONSULTING, WASHINGTON

“Obviously, this was not too much of a surprise. They stayed with the status quo by reiterating that they intend to keep rates exceptionally low for an extended period of time. And Hoenig again is dissenting. But what would generally be considered a slightly dollar-negative stance by the FOMC, is still being overshadowed by sovereign debt issues in Europe. That’s driving the market today. The dollar might pare back a bit this afternoon, but generally we still expect it to be supported against the euro.”

JOHN CANALLY, ECONOMIST/INVESTMENT STRATEGIST, LPL FINANCIAL, BOSTON:

“It’s a slight upgrade of labor market and a slight upgrade of the economy. But they left the “extended” language alone. They didn’t talk about the balance sheet at all. It’s not much of a change at all from the last statement.

“For the stock market it’s neutral. For the bond market, the short-end is rallying a little bit but this could be potentially viewed as negatively for the long end.

“You might get some murmuring that the Fed may be behind the curve with inflation from the hawkish members of the Fed and bond vigilantes. They might say why isn’t the Fed raising rates if the economy is improving.

“I’m still for a rate hike in late fall, early winter.”

SUBODH KUMAR, CHIEF INVESTMENT STRATEGIST, SUBODH KUMAR & ASSOCIATES, TORONTO:

“The downgrades in Europe is probably having an impact on the way the Fed is thinking. The risk is that they get frozen into their comments about extended periods, since that’s language they don’t need. They shouldn’t change rates right now, but I’m disappointed they didn’t address that language.

“The fact that the Fed is keeping rates low will be a relief for stocks, which have been in a trading range recently. I’m also expecting gold to move higher as a hedge against currencies with all the nervousness about Europe.”

OMER ESINER, SENIOR MARKET ANALYST, TRAVELEX GLOBAL BUSINESS PAYMENTS, WASHINGTON DC:

“Fed has maintained that the economy is improving gradually. And as long as inflation remains very low there’s little incentive for the Fed to remove stimulus given the fragile state of the U.S. housing and labor sectors.

“Moreover, the worsening of the situation in Europe, with the heightened sovereign risk, will restrain Fed hawks a bit. If anything, the Fed will keep its cautious stance at time of higher global uncertainty.”

MARKET REACTION: STOCKS: U.S. stocks (Read more about the stock market today. ) add slight gains BONDS: U.S. Treasury debt prices trim losses FOREX: U.S. dollar falls versus euro

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Instant View: Fed holds rates steady; more upbeat on economy