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Federal Reserve Statement: Bernanke and FOMC Expected to Leave Rates Unchanged

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Bernanke LIVE Stream: Fed Chair Holds Press Conference After FOMC Statement

The Federal Open Market Committee released a statement on Wednesday announcing the continuation of its monthly purchases of $45 billion in treasury bonds and $40 billion in mortgage-backed securities. The Fed will also keep the federal funds rate of 0% - 0.25% unchanged. There were no surprises in the statement, which noted that inflation is expected to be about a half of a percentage point above the longer term goal of 2%. The FOMC's announcement reiterated its earlier statements that the federal funds rate will remain at its lowest point as long as unemployment remains above 6.5%

Fed Statement Transcript: FOMC to Continue $85 Billion in Monthly Bond Buys

Full transcript of the FOMC's March 20 statement:

Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year.  Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated.  Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive.  Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices.  Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.  The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.  The Committee continues to see downside risks to the economic outlook.  The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.  The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.  Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months.  The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.  In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.  In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.  In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.  When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.  Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

Federal Reserve Statement: Bernanke and FOMC Expected to Leave Rates Unchanged

On Wednesday at 2 PM, the U.S. Federal Reserve will release its economic projections for the next two years, including its inflation forecast for the next two years, as well as individual projections from members of the Federal Open Market Committee. The FOMC will also release a statement explaining its latest decision concerning interest rates and other decisions concerning monetary policy. At 2:30 PM, Federal Reserve Chair Ben Bernanke will hold a press conference explaining the latest action (or inaction) from the Fed. 

As usual, the investing world will be watching today and hanging on every word in the FOMC's statement and in Bernanke's press conference. The Fed is expected to leave rates unchanged, and continue its bond purchasing program to the tune of $85 billion per month through the third quarter of 2013. 

Previously, Bernanke has said that as long as the unemployment rate remains above 6.5%, it would continue its ultra-loose monetary policy. The February unemployment rate was 7.7%.

Stocks have been on a tear, with the Dow recording an all time high two weeks ago upon exceeding 14,400. This is due in large part to multiple rounds of quantitative easing, the first of which was announced by the Fed in late 2008 in response to the housing collapse and subsequent market crash brought on by the insolvency and bailing out of several major financial institutions. Over the last three and a half years, the Fed, with its zero interest rate policy (ZIRP), has sought to discourage investors from taking refuge in the U.S. dollar and treasury bonds — typically seen as safe-haven assets — in an attempt to spur lending. 

The Fed's policies have prompted investors to seek yields elsewhere, particularly stocks, commodities, and precious metals. On Wednesday morning, stocks were in positive territory. The Dow, S&P, and NASDAQ were all up about 0.5% at 10:10 AM on Wednesday.

The Fed's announcement is not expected to send the markets spasming in any particular direction, as it has made clear the conditions under which it would reverse course on its monetary policy. For all intents and purposes, the Fed's bond-buying program and ZIRP have been priced into the market. Any hint of a deviation from this plan, however, could shake things. This is not expected.

There is also concern that stocks have been too hot, and are due for a pullback, lest equities become too hot too fast. Regardless of the Fed's announcement, expect the smart money to start flowing out of stocks soon.