Instant view: Fed sees economy on firmer footing

Reuters

NEW YORK (Reuters) - The U.S. Federal Reserve maintained its ultra-loose monetary policy on Tuesday, saying the economy was gaining traction while flagging potential inflation risks from costlier energy and food.

The widely expected decision comes on a day of selling on stock markets around the world as investors assessed the devastating toll of Japan's earthquake and tsunami, and fretted over the possibility of a broader nuclear crisis.

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The heightened uncertainty reinforced the case for a steady-as-she-goes policy decision from the Fed, which markedly upgraded its view of the U.S. recovery and labor market.

In a unanimous decision, the Fed vowed to continue its $600 billion government bond-buying program as scheduled, and reiterated a pledge to keep interest rates at very low levels for an extended period.

ANALYSTS COMMENTS:

PAUL BALLEW, CHIEF ECONOMIST, NATIONWIDE, COLUMBUS, OHIO:

"They are admitting there are improvements in the economy. They are acknowledging inflationary pressure from higher energy and commodity prices but they say these factors are temporary. It's more of the same thing in terms of message. We think they will signal more of an exit strategy some time in the second half of the year.

"We don't think the Japan situation is a game changer. It's terrible and tragic, but we think more of the situation in Bahrain and the Middle East is more of a game changer."

GREG SALVAGGIO, VICE PRESIDENT OF TRADING, TEMPUS

CONSULTING, WASHINGTON:

"The most interesting thing is their saying commodities are putting upward pressure on inflation. They're signaling that they're starting to watch energy prices. If we see oil at levels near $100, it might suggest the Fed raises rates sooner rather than later. The euro's looking toppish and is a sell anywhere up to $1.4030, as the Fed's actually mentioning upward pressure on inflation is bullish.

"If you get short yen around here before it hits 80 per dollar, that's a really good trade. Authorities are not going to let it go below there. And if they intervene, they'll have the blessing of other central banks. With all that's going on and with dollar/yen at 81, there's no way Japanese corporate can survive otherwise."

DIMITRI DELIS, FIXED INCOME STRATEGIST, BMO CAPITAL

MARKETS, CHICAGO:

"They said the economy's on a firmer footing so I think what that means is that they are not going to consider at this time a third round of Treasury purchases, and when QE-2 ends that will be a negative for the bond market."