Instant view: Fed sees economy on firmer footing

Reuters News
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Posted: Mar 22, 2011 12:05 PM
Instant view: Fed sees economy on firmer footing

NEW YORK (Reuters) - The U.S. Federal Reserve maintained its ultra-loose monetary policy on Tuesday, saying the economy was gaining traction while flagging potential inflation risks from costlier energy and food.

The widely expected decision comes on a day of selling on stock markets around the world as investors assessed the devastating toll of Japan's earthquake and tsunami, and fretted over the possibility of a broader nuclear crisis.

The heightened uncertainty reinforced the case for a steady-as-she-goes policy decision from the Fed, which markedly upgraded its view of the U.S. recovery and labor market.

In a unanimous decision, the Fed vowed to continue its $600 billion government bond-buying program as scheduled, and reiterated a pledge to keep interest rates at very low levels for an extended period.

ANALYSTS COMMENTS:

ERIC GREEN, CHIEF ECONOMIST AND HEAD OF RATES STRATEGY, TD

SECURITIES, NEW YORK:

"Events in Japan and geopolitical issues really didn't weigh in terms of how they (the Fed) are seeing the evolution of risks in their overall outlook."

"This statement is more bullish. They talk about the gradual return to higher levels of resource utilization in the context of price stability. In previous statements they had seen that as being disappointingly slow, so that's a more bullish change. They say the economy is on a firmer footing, more of an upgrade on overall growth profile in that regard."

"They effectively made the statement that disinflation is dead."

" Its pretty clear that in terms of the oil market their view is that this is transitory. I think this is bearish for rates. There isn't anything in here to suggest that the Fed is treating events in Japan as a threat to the overall outlook, if anything they are looking through this at this point and saying we are very much on track for where we would want to be."

PAUL BALLEW, CHIEF ECONOMIST, NATIONWIDE, COLUMBUS, OHIO:

"They are admitting there are improvements in the economy. They are acknowledging inflationary pressure from higher energy and commodity prices but they say these factors are temporary. It's more of the same thing in terms of message. We think they will signal more of an exit strategy some time in the second half of the year.

"We don't think the Japan situation is a game changer. It's terrible and tragic, but we think more of the situation in Bahrain and the Middle East is more of a game changer."

GREG SALVAGGIO, VICE PRESIDENT OF TRADING, TEMPUS

CONSULTING, WASHINGTON:

"The most interesting thing is their saying commodities are putting upward pressure on inflation. They're signaling that they're starting to watch energy prices. If we see oil at levels near $100, it might suggest the Fed raises rates sooner rather than later. The euro's looking toppish and is a sell anywhere up to $1.4030, as the Fed's actually mentioning upward pressure on inflation is bullish.

"If you get short yen around here before it hits 80 per dollar, that's a really good trade. Authorities are not going to let it go below there. And if they intervene, they'll have the blessing of other central banks. With all that's going on and with dollar/yen at 81, there's no way Japanese corporate can survive otherwise."

DIMITRI DELIS, FIXED INCOME STRATEGIST, BMO CAPITAL

MARKETS, CHICAGO:

"They said the economy's on a firmer footing so I think what that means is that they are not going to consider at this time a third round of Treasury purchases, and when QE-2 ends that will be a negative for the bond market."