After the Fed...

The market continues to digest the meaning of the Fed's inaction yesterday. There was no increase in Treasury or other long-term asset purchases. There was no indication that an exit strategy was coming more into view. There was not heightened commitment, beyond what it has said in the past, to keep rates low. There seemed to be no protest of the recent firming of the effective Fed funds rate to the top of its policy range. For the first time in a while, the Fed had the luxury of entering a wait-and-see mode. To the extent the statement changed, it was very subtle. In a small but significant way the Fed signaled that the risk of deflation had eased and recognized further stabilization/moderation of activity that still stops shy of recovery.

The fact that the Fed did not extend its long-term asset program or even tweak it, weighed on bonds amid disappointment. The Fed has completed about $170-$180 bln of its $300 bln Treasury purchases. It is on track to complete it in Sept. Hopes may linger into the August meeting that the Fed will extend its purchases. To the extent that technical factors, like the repayment of TARP funds, recent corporate tax payment and end of month/quarter/half year, are temporary, the Fed funds rate is likely to begin easing shortly.