Fed maintains target rate for federal funds, and promises to continue Quantitative Easing if conditions don't improve

The Federal Open Market Committee maintained its 0% to 1/4% target range for the federal funds rate today. The Fed repeated that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period” and added that “the Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.”

The FOMC made explicit its willingness to provide further accommodation, if needed, saying the Committee “is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

On inflation, the Fed said “Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability."

BOTTOM LINE

Although the Fed took no action today, the FOMC statement made explicit Chairman Bernanke’s willingness (conditional on the economic data) to take further actions to ease policy by increasing purchases of Treasuries. However, it is a conditional promise and if the data show that the economy continues to expand at a moderate rate (as we expect) then we will not see any furtherquantitative easing. However, the Fed continues to stress that exceptionally low rates are likely to remain appropriate for an extended period because of the outlook for slack and because of low and stable inflation and inflation expectations (in this statement, the Fed was also explicit about inflation currently running below the level policymakers would be comfortable with over the long run).

Who really knows when, but it will likely not be for a year that the Fed would be willing  to hike rates and, given the outlook for unemployment, the probability is growing that this move does not occur until sometime in 2012. Gold is making a new record high in the wake of this policy statement, which suggests that there is growing market discomfort with the idea of additional Quantitative Easing.
Fed Statements side by side

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