Yesterday, the Federal Reserve's Federal Open Market Committee (FOMC) released a statement addressing the present state of the U.S. economy and prospects for changes in the Federal Reserve's open market activities. Information received since the FOMC met in November suggests that “economic activity has continued to pick up and that the deterioration in the labor market is abating.” In particular, the statement notes that “the housing sector appears to be expanding,” and that although “businesses are still cutting back on fixed investment,” the cutbacks are “at a slower pace.” The FOMC anticipates that “policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization.” Also, with “longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.”

Although the FOMC acknowledges a strengthening of the economy, the FOMC “anticipate[s] that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” and plans to “maintain the target range for the federal funds rate at 0 to 1/4 percent.”

By the end of the first quarter of 2010, the Federal Reserve expects to complete its purchase of a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt to “provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets.” In light of the improving conditions in the financial markets, the FOMC expects that “most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010.” The Federal Reserve and its central bank counterparties will also work to close temporary liquidity swap arrangements by February 1, 2010.