The Fed Decision: Reactions

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Assuming that the Fed first starts to shrink the amount of excess reserves held by commercial banks through large scale reverse repo operations, then interest rates hikes will be even further off. If, as we fear, economic growth begins to slow again next year, as the boost from pent up demand and restocking fizzles out, then interest rates could stay at near-zero until 2012 or even beyond.

Meg Brown, Senior Currency Strategist, Brown Brothers Harriman

The greenback was giving up ground today awaiting the FOMC. The FOMC statement was slightly more dovish than some had expected, and the dollar has weakened further. The FOMC highlighted that low rates of resource utilization, subdued inflation trends and stable inflation expectations (replacing "economic conditions") will warrant exceptionally low levels of the federal funds rate for an extended period. The statement disappointing some who had called for a modification in the phrase in order to begin preparing the market for an eventual rate hike. Instead the Fed has redirected attention to inflation expectations and resource utilization.

The Fed's assessment of the economy was slightly more upbeat with the Fed acknowledging a continued pickup rather than a pickup in economic activity. Household spending was described as increasing rather than stabilizing. However, the financial markets were described as unchanged. The Fed had noted a further improvement in September.

The inflation assessment was left unchanged reinforcing the view that the Fed can afford to be patient. Fed reiterated that with inflation expectations stable and resource utilization slack, inflation would remain subdued for some time. The Fed did not acknowledge rising commodity prices as some had expected.

Drew Matus, U.S. Economist, Bank of America Merrill Lynch

As we expected, the FOMC kept its central message unchanged, noting that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." Indeed, we expect to see this language for a few meetings yet, particularly as the Fed detailed what these "economic conditions" are: low rates of resource utilization, subdued inflation trends, and stable inflation expectations. In our view, they remain a long way from hiking.