Fed Leaves Rates Alone, Reveals Nothing About Exit

By Daniel Indiviglio

Markets can rest easy this summer: the Federal Reserve has no intention of even hinting that it will raise rates in the near future. In what could be characterized as the most boring, unrevealing Federal Open Market Committee meeting statement in some time, the Fed mostly echoed what it's said in April and past months.

The only even vaguely interesting new sentence in the statement was:

Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.

This statement matters because it explains why the rest of the statement is so boring. Sovereign debt problems in Europe have shaken global markets. The Fed isn't warning of a double-dip recession here: it still expects a slow recovery. But it also appears to imply that an economic contraction isn't beyond the realm of possibility, under the circumstances.

By now, many people expected that we would have a more concrete blueprint of when the Fed's exit strategy will begin. When might it begin raising rates? When will it begin selling the assets it accumulated during the financial crisis? We won't know the answers to these questions as soon as we thought, because the problems in Europe have made the Fed wary about scaring the market with signs of tightening.

As for rates, the Fed continues to assure banks that they will remain "exceptionally low" for "an extended period." Kansas City Federal Reserve President Thomas M. Hoenig remains the lone dissenter. He believes that this language should be weakened so the central bank can feel more flexibility to raise rates quickly if inflation suddenly manifests itself.

Of course, at this time, inflation is very low. It appears to be well under control, which makes it unsurprising that the Fed wouldn't feel the need to provide greater certainty on when it might raise rates by changing its language. As the statement noted, energy prices are actually deflationary.

The next FOMC meeting is scheduled for August.

This article available online at:

http://www.theatlantic.com/business/archive/2010/06/fed-leaves-rates-alone-reveals-nothing-about-exit/58603/