The Federal Reserve maintained a commitment to keep interest rates near zero for a “considerable time” after asset purchases are completed, saying the economy is expanding at a moderate pace and inflation is below its goal.

“Labor market conditions improved somewhat further” while “significant underutilization of labor resources” remains, the Federal Open Market Committee said today in a statement in Washington. “Inflation has been running below the committee’s longer-run objective.” In July, the Fed said inflation was “somewhat closer” to its goal.

Policy makers tapered monthly bond buying to $15 billion in their seventh consecutive $10 billion cut, staying on course to end the program in October. Bond purchases intended to hold down long-term interest rates have swelled the Fed’s balance sheet to $4.42 trillion.

“They want to let the market know they are not ready to raise rates anytime soon,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte,North Carolina. “Inflation is buying them time to do nothing. Inflation is running below expectations so they don’t need to be engaged” in signaling tightening.

“The likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year,” according to the statement.

The personal consumption expenditures index (SPX), the central bank’s preferred price gauge, increased 1.6 percent in July from a year earlier and hasn’t exceeded the Fed’s 2 percent objective since March 2012.

David Fuller's view

This is very much in line with what Janet Yellen has been indicating for many weeks: QE ends next month but the Fed is in no hurry to raise short-term interest rates.  Perhaps more importantly, there is nothing in recent news to suggest that the Fed will be bundled out of this stance.  Nevertheless, what might change this outlook?

The first item of interest will be Thursday’s Alibaba float.  I am expecting this to be successful because Wall Street’s bull trend has yet to be challenged. Additionally, Alibaba is exciting because it is a huge, so far very profitable Chinese company, and its successful float would be a feather in Wall Street’s cap.  If Alibaba soars immediately following the float, as it could, the Fed might become concerned about bubble characteristics, especially if the Russell 2000 Index – the canary in the coalmine in terms of Wall Street liquidity – does not break downwards from its current trading range.

A rise above 3% in US 10-Yr Treasury Bond yields, when it eventually occurs, would certainly catch the Fed’s interest.  Dr Yellen will also be looking for a further pick-up in GDP growth, job creation and inflation.  All of these factors would be signs of a strengthening US economy, which the Fed seeks, but it would also raise short-term interest rates.  If these changes occur slowly, Wall Street’s bull market could continue with the stronger economy, on the basis that earnings were also increasing.  Conversely, rapid changes – from T-Bond yields to inflation – would be more worrying.  Fortunately, this does not appear to be a near-term or perhaps even medium-term risk.