There were no surprises in today's FOMC statement. The Fed retained its "extended period" language for keeping the target rate extremely low. The vote for the policy decision was unanimous.
Regarding the economy, the statement said that "the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually."
While noting that some prices have risen significantly, the FOMC participants overall see inflation expectations as stable and underlying inflation as subdued.
"Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March. Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued."
The Fed does appear to be giving expectations greater consideration as it is now given as one of the reasons allowing for the continued and exceptionally low policy rate. Also allowing this are low rates of resource utilization (primarily unemployment) and subdued inflation trends (meaning for core rates).
Despite some District bank presidents questioning in earlier speeches the need for the second round of quantitative easing, the FOMC voted to complete the $600 billion in expansion of the Fed's balance sheet in QE2.
"To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter."
There was no discussion of what should happen with the balance sheet level after June. That is, we do not know if the Fed will let the balance sheet unwind with pay down on mortgage-backed securities and agency debt and maturation of Treasuries. Or the Fed could continue to reinvest pay down. This decision will need to be made at the next FOMC meeting.
Scanner: For a simple point of reference, here is a chart showing the level of Excess Bank Reserves held at the Fed. These excess reserves have been suspected of having the ability of being in more than one place at the same time! As the balance grows, so does the benefactor of the hidden use (the stock market). Observe the increased balance since the implementation of QE1 in November 2008 and of QE2 in November 2010.
When the Fed is utilizing its quantatative easing program, the new cash is called monetary base. Here is a chart of the Monetary Base for the past ten years. When the Fed is creating monetary base it is also, and obviously, creating excess reserves at banks. The banks are free to use it as they wish. It's the Fed that has little wiggle room. The Fed is essentially following orders to create more money or take it away in a partnership that does not fit conventional understanding.