The decision from the Federal Open Market Committee on interest rates came today as the Dow Jones Industrial Average was hitting 12,000 for the first time in more than two years.  As you should have expected, Ben Bernanke and the FOMC decided to leave the target Fed Funds Rate at the same target of 0.00% to 0.25%.  The Federal Reserve did give a bit more of an upgrade to the economy, somewhat in-line with what was given in the latest Beige Book commentary.  The vote was unanimous at 11-0 to keep the same rates.

At issue for the important parts of the FOMC, we were looking for updates to the quantitative easing measures, or QE2. On this front, the previous pace is being maintained.  The FOMC will continue expanding its holdings of securities and will continue to reinvest principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.

The same “extended period” was kept in the language as well: “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 utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”

The upgrade was an upgrade-light: “… the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions.  Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, while investment in nonresidential structures is still weak.”

The FOMC said that underlying inflationary pressures, i.e. the core inflation, remain low.

This same zero-rate policy has been in place since late 2008, making this part of the interest rate cycle a rather lengthy one.

The last time the DJIA was above 12,000 was June of 2008. It was above 13,000 in May 2008 and last above 14,000 in October of 2007.

The full statement from the FOMC is here for you Fed-heads.

JON C. OGG

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