The Fed Decision: Reactions

A sampling of analyst comment on the Nov. 4 announcement keeping interest rates low

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Ian Shepherdson, Chief U.S. Economist, High Frequency Economics

The Fed left interest rates on hold and said, again, that rates will be kept "exceptionally low for an extended period." There is no substantive change in the discussion of the macro situation, but the Fed did expand on the rationale for keeping rates low, namely the triumvirate of "low rates of resource utilization, subdued inflation trends and stable inflation expectations". Note that "resource utilization" is fedtalk mostly for the unemployment rate rather than industrial cap use. The Fed is always obsessed with these three variables, but spelling them out now puts down markers for what has to change before rates move. The first hike is still more than a year away. Finally, asset purchases are reaffirmed to end in March but the agency purchases will be cut to $175 billion from $200 billion because of tight supply, not a policy shift.

Julia Coronado, Senior Economist, BNP Paribas

The Federal Open Market Committee statement has essentially the same tone as the one from the September meeting. They maintained the language that they anticipate rates will remain "exceptionally low" for and "extended period". But they added that it is not just economic conditions that warrant such a policy stance but "economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations." The more expanded description of the current policy stance is likely a response to debate and to speculation that they may be nearing a point where they want to signal that a policy tightening is on the horizon.We don't believe that changing the language was ever on the table, but they are providing clarity on why; the absolute decimation in the labor market implies that many quarters of growth will be required before downward pressures on inflation cease being the predominant risk. In other words, one quarter of 3.5% growth is peanuts given the economic destruction we have seen. There were very few changes to their description of the economy or their dovish stance that resource slack is likely to mean subdued inflation "for some time". Indeed there was no upgrade to the economic outlook relative to September; they still believe "economic activity is likely to remain weak for a time." This committee is more dovish than the market and will likely remain cautious about the recovery until the labor market has turned decisively positive.

Paul Ashworth, Senior U.S. Economist, Capital Economics

The absence of any major changes in today's U.S. Fed statement, in particular the renewed commitment to keep interest rates at "exceptionally low levels" for an "extended period" and to continue buying mortgage-backed securities until the end of the first quarter of 2010, demonstrates that officials are in no rush to tighten policy. The only change is that the Fed now intends to buy $175 billion in agency debt, slightly less than the $200 billion it previously had pledged to purchase. This is NOT the first step towards implementing an exit strategy for quantitative easing. The Fed was careful to explain that the reduction is because there simply isn't enough of this debt out there that the Fed can snap up without distorting the market. Putting the reduction in perspective, the Fed originally pledged to buy $1,750 billion of various securities, so that $25 billion reduction in the target for agency debt equates to slightly less than 1.5%. What's more telling is that this latest statement makes no reference to the recent surge in many commodity prices, particularly crude oil. We suspected that the more hawkish FOMC members would have insisted on acknowledging that development. Overall, any change in the Fed's policy stance is still a long way off. Quantitative easing won't be put into reverse until the Fed has finished buying mortgage-backed securities at the end of first quarter 2010.