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While you were sleeping: Fed keeps to the script

Wednesday 17th March 2010

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The Federal Reserve will keep interest rates at current levels for “an extended period”, adding that it expects the pace of recovery in the world’s biggest economy is “likely to be moderate for a time”.

The Fed, or US central bank, affirmed its target range for the federal funds rate at between zero and 0.25%. It also affirmed that it will complete asset purchases already announced as planned by the end of this month.

In early afternoon trading, the Dow Jones Industrial Average was up 0.03%, the Standard & Poor’s 500 edged up 0.31% and the Nasdaq Composite rose 0.3%.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’ fell 1.28% to 17.77.

In Europe overnight, the Dow Jones Stoxx 600 surged 1% to 259.03, its highest level in eight weeks.

Among national benchmarks, the UK ’s FTSE 100 added 0.48%, Germany ’s DAX 30 rose 1.14% and France ’s CAC 40 advanced 1.23%.

The Helsinki Stock Exchange General Index has rallied 11% in 2010, the best performance out of 23 developed markets tracked by Bloomberg.

European shares rallied in relief after S&P’s decision to affirm Greece’s debt rating and to remove it from a potential downgrade. Additionally, finance ministers from the euro zone agreed on the use of emergency loans to assist Greece if necessary.

Among the advancing stocks included Barclays Plc, BNP Paribas SA and Lindt & Spruengli AG. Neste Oil Oyj, Royal Dutch Shell Plc, Eurasian Natural Resources Corp also recorded gains.

The Dollar Index, which measures the greenback against a basket of six major currencies, fell 0.63% to 79.75.

In its statement, the Fed made the case that more time was needed for the recovery to take hold in the US.

“Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labour market is stabilising.

“Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls.

“While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the committee anticipates a gradual return to higher levels of resource utilisation in a context of price stability.”

Those investors who bet on a potential change in language on the outlook for rates were wrong.

“The committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilisation, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

There was one dissenter in today’s statement, Thomas Hoenig, president of the Fed bank in Kansas. He was also the sole dissenter a month ago.

He dissented because, according to the Fed statement, he believes “that continuing to express the expectation of exceptionally low levels of the federal funds rates for an extended period was no longer warranted because it could lead to the build up of financial imbalances”.

The euro rose against the dollar to intraday peaks at US$1.3776, according to Reuters data, from US$1.3724 before the statement. It last traded at US$1.3748, still up 0.5% on the day.
The dollar slipped against the yen to 90.44 yen from 90.67 yen previously.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, rose 0.97% to 273.41.

Ahead of the Fed statement both oil and gold rose. Oil advanced more than 2% and gold rose to near US$1125 an ounce.

OPEC is expected to keep output unchanged at its Wednesday meeting in Vienna, with Saudi Arabia's oil minister saying the producers' group may not need to adjust output policy this year if the oil market remains stable.

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