Fed keeps aggressive despite signs of economic rebound

Concluding a two-day meeting Wednesday, the policymaking Federal Open Market Committee left the base federal funds rate in a range of zero to 0.25 percent, as had been widely expected.

The Fed offered no indication it would ramp up or scale back its effort to pump liquidity into the financial system, an effort that began with a pledge this year to buy up more than one trillion dollars in U.S. government and agency securities to push down interest rates.

“I think the Fed is staying the course,” said Adlofo Laurenti, economist at Mesirow Financial.

“They have done a lot over the past several months and the market had a lot to digest. They are unwilling to change their game at this point given that the economy is in transition.”

The lack of change by the U.S. central bank “keeps its options open,” said Ryan Sweet at Moody's Economy.com.

“The Fed doesn't want to show all its cards or unnecessarily commit to purchasing additional assets to bring down long-term Treasury and mortgage rates.”

The FOMC statement, which was similar to the one issued on April 29, said the economy remained weak but was showing signs of improvement.

“Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing,” the panel said.

“Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.”

Dismissing the notion that its stimulus effort would spark inflationary pressures, the panel said it expects “that inflation will remain subdued for some time.”

Some viewed the Fed statement as more upbeat than its last one April 29.

By holding to its course, the Fed seems to be saying “that the deflationary fears that may have been pervasive only a few months ago among some members may have abated,” added Millan Mulraine, economics strategist at TD Securities.

Josh Feinman, chief economist at Deutche Bank's DB Advisors, said the Fed is cautious about pulling back from its aggressive stand with the economy still fragile.

“They're not about to stop just because the patient is starting to come out of a coma. They want to see the patient up and on his feet before they take him off life support.”

The U.S. economy declined by 5.7 percent in the first quarter of this year after a 6.1 percent contraction in the last quarter of 2008.

Some analysts see a return to growth as soon as the third quarter. Based on latest projections by the Fed, the economy will contract between 1.3 and 2.0 percent in 2009, which suggests a rebound in the second half.

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