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• As widely expected, the FOMC kept the fed funds rate unchanged.

• The tone and text of the statement were almost identical to the previous one, though the Fed acknowledged that U.S. economic activity is stabilising.

• In terms of the assets purchase program, the Fed decided to keep the composition unchanged, but will slow the pace of Treasury purchase.

As has been widely anticipated by the markets, the FOMC decided to keep the fed funds rate unchanged at the 0.00% to 0.25% range, and reiterated its commitment to keeping the policy rate low for an “extended period of time”. The tone of the statement was almost identical to the last one, though the Fed noted that the recent evidence suggests that U.S. economic activity “is levelling out”, which is in contrast to the last statement which stated that “the pace of economic contraction is slowing”. Outside of this, the wording used for the economic and inflation assessments were identical.

In terms of the assets purchase program, the FOMC held to its previously announced composition, and stated that “to promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.” In effect, the Committee has decided against expanding any of the previously announced programs and instead will stretch the previously announced $300B over a longer time span. Even so, the Fed noted that it will “continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets”, thereby keeping some flexibility. This, however, is not new.

On the whole, with only the opening sentence of the Statement changed to reflect the apparent stabilisation in the U.S. economy, and one sentence inserted to indicate the slowing in the pace of Treasury purchase, the tone and wording of this Statement was identical to the last. Notwithstanding this, it appears that the FOMC is slowly moving the U.S. economy from the intensive care unit to the recovery suite, where it will nurse the economy back to health. This shift is particularly pivotal, as it shows that the Fed’s concerns about the downside risks to growth have all but diminished, though, of course, the recovery is likely to be slow and fragile – given the distressed state of U.S. households. With this in mind, market analysts continue to maintain our bias for the Fed to keep the fed funds rate unchanged until some time in the second half of 2010.