US Fed Statement Shows Policymakers Increasingly Optimistic that Economy is Picking Up

The FOMC's statement presented a more upbeat message about the economy's outlook with policymakers saying that activity has picked up and reciting a list of more favourable developments since the August meeting. The Fed still anticipates "economic activity will remain weak for a time" but appears more optimistic that with the support of accommodative policy will see the economy strengthen resulting in "higher levels of resource utilization." On the inflation outlook, the Fed still expects price pressures to "remain subdued for some time" given the current amount of slack in the economy and anchored inflation expectations.

Against this backdrop the FOMC kept the target for the Fed Funds rate in the 0 to ¼ percent range. They also announced changes to the timing of the program to purchase mortgage-backed and agency debt, similar to changes they made to the timing of the US Treasury bond purchase program in the August statement. While the size of these programs was left unchanged the Fed extended the timeline for the purchases to the end of the first quarter of 2010 from the original timetable which was to finish at the end of this year. The statement indicated, once again, that the low level of the policy rate would likely be maintained "for an extended period" with "adjustments to its credit and liquidity programs" being made "as warranted."

Policymakers stuck to their stance that they will "evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets." Today's decision was unanimously approved by all members.

Today's statement was a continuation of the migration toward a more positive outlook for the US economy. The change in the statement's language was in line with Chairman Bernanke's recent comments that "from a technical perspective the recession is very likely over at this point." But even with this more upbeat assessment, the FOMC remains cautious and looks for a relatively weak economic performance in the near term. Given the uncertainties about the strength of the economy's upward momentum, we read today's message as the Fed indicating that the policy rate will remain at extraordinarily low levels although these recent changes to its other policy initiatives do suggest that exit strategies are being formulated and are likely to be implemented as soon as the economy's recovery is firmly entrenched and financial market volatility has ebbed.

FOMC statement.

http://www.federalreserve.gov/newsevents/press/monetary/20090923a.htm