NEW YORK, May 1 (Reuters) - The U.S. Federal Reserve stuck to its plan to buy $85 billion in bonds each month to push down borrowing costs and prop up the economy, citing risks to growth from recent budget tightening in Washington.
Describing the economy as expanding moderately in a statement that largely mirrored its March decision, Fed officials cited continued improvement in labor market conditions.
But they reiterated that unemployment is still too high for policymakers' comfort, reinforcing their desire to keep buying assets until the outlook for jobs improves substantially. 'Fiscal policy is restraining economic growth,' the Fed said in its policy statement. 'The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation.'
CHRIS MCREYNOLDS, HEAD OF US TREASURY TRADING, BARCLAYS, NEW YORK:
'It's essentially where I thought they were going to come out. I think the market had gotten itself ready for them to talk more about the exit strategy for the QE and the consensus was for them to say they were going down to 50 billion a month by the end of the year but you clearly didn't get that.
'You got a more even handed approach. You got them saying maintain 85, and the last paragraph says they will adjust as their outlook for growth or inflation changes. If the growth stays where it is but the PCE starts to dip further you could get even more QE. So far we're seeing the bond market come under a little pressure, but it's still up substantially on the day but the curve is steepening a little bit since the announcement, and the commodity market seems to have stabilized a little bit here.'
SAM DIEDRICH, PORTFOLIO MANAGER FOR PAAMCO, IRVINE CALIFORNIA:
'The significant shift in this statement is alluding to the possibility that this program could expand. Even though nothing happened, they met the market's expectations in that they acknowledge that they may have to expand the program
'Even just indicating that they are considering expanding the program with more certainty could have the effect they want, so they may not have to do anything.'
JOHN CANALLY, INVESTMENT STRATEGIST AND ECONOMIST, LPL FINANCIAL, BOSTON:
'This puts more pressure on the minutes to be released later to give details on how much they discussed about the need to increase asset purchases. People had been thinking about a tapering off of purchases. This is QE till it works.
'Data since the last FOMC meeting was pretty weak. But the hurdle for increased asset purchases is pretty high. Overall, this statement was a non-event.
Going into the ECB meeting, it might cut its policy rate and it might give some forward guidance which the most you could expect to get. Those looking for quantitative easing from the ECB will be disappointed.'
MICHAEL MORAN, CHIEF ECONOMIST, DAIWA SECURITIES AMERICA, NEW YORK:
'The only two things that jumped out in the statement. One was that their language was a little stronger on fiscal policy, saying that fiscal policy is restraining growth. The other was that they are prepared to increase or reduce the pace of bond purchases. They just want to emphasize that the purchase program is meant to be flexible and can be easily adjusted over time. One thing they did not change was their characterization of inflation. I thought they might highlight that inflation was slowing, but they did not do that.'
ANDREW WILKINSON, CHIEF ECONOMIC STRATEGIST, MILLER TABAK & CO, NEW YORK:
'The latest minutes are very little changed in terms of content and suggest the economy continued to expand at a moderate pace. While there was no mention of the recent set of data suggesting at least a softer period for global and domestic growth, the minutes elevated the March observation saying 'fiscal policy is restraining economic growth.'
'The feeling that the economy was subject to downside risks remained a feature, while the Fed hinted that it could alter the amount of its bond purchases in either direction in response to incoming data. We would argue that for the time being the slower period of growth is largely the result of external events while the fiscal headwinds are hampering the Fed's efforts at a reducing pace over time.'
TOM PORCELLI, CHIEF U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK:
'A good way of characterizing this statement is that it is ham on rye. They barely changed anything with its characterization of inflation and economic backdrop and it is virtually identical to the previous statement.'
'This statement is a modest surprise give the recent weak data. It does suggest that the Fed is not fully buying into the idea that economic activity is losing momentum.'
PAUL NOLTE, MANAGING DIRECTOR AT DEARBORN PARTNERS IN CHICAGO:
'Near term there's no change and that's what the markets were looking for.
'They left flexibility to purchase even more than the 85 billion (in monthly bond purchases). Very little change, plenty of liquidity available for the markets.
'We haven't seen a big difference in their comments month to month. There are little tweaks, and it is going to be this way for the foreseeable future.'
ROBBERT VAN BATENBURG, DIRECTOR OF MARKET STRATEGY, NEWEDGE USA LLC, NEW YORK:
'The key sentence was on the Fed and its asset purchases and whether they might taper off purchases. There was no word on that. This was a fairly market neutral statement.
There is reference to core inflation with the PCE going into flatline. The core inflation rate is not moving even with all the stimulus.
Going into Thursday, there are some people who believe that (ECB President Mario) Draghi is in a tough position as there is pressure to pull away from the region's austerity measures. The consensus is that they are going for a rate cut. I doubt that's enough. They probably want to open the window for lower quality collateral to help the banks in the peripheral countries to get credit flowing again.'
STEVEN RICCHIUTO, CHIEF ECONOMIST, MIZUHO SECURITIES, NEW YORK:
'The tone of the statement is exactly what you expected, which was a little bit more balanced. You can vary the size of purchases both increasing and decreasing and there is a recognition that inflation is running below target, which are things that stand out in people's minds...
'The reality is this came actually as expected. It's not going to have any meaningful effect at all.'
JOSEPH TREVISANI, CHIEF MARKET STRATEGIST, WORLDWIDEMARKETS, WOODCLIFF LAKE, NEW JERSEY:
'The Fed characterization of the economy continuing to expand at a moderate pace means they are satisfied with the results of their QE policy to date. This will support the dollar though probably not the stock market.'
TODD SCHOENBERGER, MANAGING PARTNER AT LANDCOLT CAPITAL IN NEW YORK:
'This is status quo, exactly what we were looking for.
'The Fed is very predictable right now, and I don't think they're going to be headline drivers for the market. The macro data recently has been weak, which supported the notion that they were going to continue with $85 billion a month. Also, we're nowhere near the unemployment rate target they set. All of that isn't good as far as the economy's growth outlook is concerned, but it is what traders wanted to hear.'
MICHAEL WOOLFOLK, SENIOR CURRENCY STRATEGIST, BNY MELLON, NEW YORK:
'The Fed did not change the pace of its monthly asset purchases, so we don't think the minutes are going to have a material impact on the market today. We already saw risk taken off the table this morning. The talk of tapering has not only been pushed to the back burner but pushed off the stove altogether. It's not something we're likely to see until 2014.'
MARKET REACTION: STOCKS: U.S. stocks slightly pared losses BONDS: U.S. Treasuries yields were slightly higher DOLLAR: The U.S. dollar erased prior losses against the yen; the euro lost ground versus the dollar
(Americas Economics and Markets Desk; +1-646 223-6300)
Keywords: USA ECONOMY/INSTANT
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