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Fed Statement

Fed Statement

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Stocks Higher after Fed Statement The central bank indicated it would keep rates near zero for "an extended period".

Bond yields climbed after the announcement Story Toolspost a commente-mail this storyprint this storyorder a reprintsuggest a storydigg thissave to del.icio.usU.S.

stocks were higher Wednesday afternoon, though down from the best levels of the session, after the Federal Reserve maintained the target range for the federal funds rate at 0%-0.25% percent and said it "continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." The statement ran counter to the expectations of some market players that the Fed would indicate that it would begin to tighten monetary policy in the near future.

Earlier in Wednesday's session, stocks had advanced following a report that May durable goods orders rose a more-than-expected 1.8%, but indexes came off their best levels as May new home sales fell 0.6% to a 0.32 million unit annual pace.

Also, the Organisation for Economic Co-operation and Development said Wednesday the U.S.

recession will bottom out this year, but any recovery will be weak.

Immediately after the Fed's 2:15 p.m.

ET announcement Wednesday, the 30-stock Dow Jones industrial average was higher by 22.22 points, or 0.27%, at 8,345.13.

The broad Standard & Poor's 500-stock index gained 9.47 points, or 1.06%, to 904.57.

The tech-heavy Nasdaq composite index was 38.70 points, or 2.19%, higher at 1,803.62.

Treasuries yields rebounded on the Fed statement, which "purposefully removed the deflation reference" from the Apr.

29 communique, notes Action Economics.

The 2-year yield bounced 2-3 basis points to 1.17%, while the 10-year yield jumped 10 basis points to 3.68%, steepening the yield curve in the process.

The dollar index was higher.

Gold futures were higher.

Energy futures were mixed after the Energy Dept.'s weekly inventory report that showed U.S.

crude oil stocks fell 3.8 million barrels.

In its post-meeting statement, the policy-setting Federal Open Market Committe said that recent data suggests that the pace of economic contraction is slowing.

Conditions in financial markets have generally improved in recent months, it noted, while household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit.

The Fed noted that businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales.

" 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," the FOMC said On the inflation front, policymakers noted that the prices of energy and other commodities have recently risen.

"However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time." The Fed reiterated its efforts to "support to mortgage lending and housing markets and to improve overall conditions in private credit markets" buy purchasing agency and Treasury securities.

It said 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.

The committee decision was unanimous.

"About the only difference between Wednesday's statement and the Apr.

29 statement is that the concern over deflation was removed," notes Action Economics, although the Fed did add the statement that "substantial resource slack is likely to dampen cost pressures." There were no hints of an exit strategy from the Fed's current policy path, notes Action Economics.

The OECD raised its forecast for the economy of its 30 member nations for the first time in two years as the U.S.

slump shows signs of easing.

The combined economy of the world's most-industrialized countries will shrink 4.1% this year and grow 0.7% in 2010, the Paris-based group said.

The new projections compare with March forecasts for contractions of 4.3% and 0.1%, according to a Bloomberg News dispatch.

The improved outlook conflicts with that of the World Bank, which this week said the global recession will be deeper than it predicted three months ago.

In anticipating a weak recovery staggered across different economies, the OECD signaled that the Federal Reserve and Bank of Japan should not raise interest rates before 2011 and recommended the European Central Bank cut its benchmark further.
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