Federal Reserve: No Change But Fed Says Uncertainty Of Inflation Outlook Remains High

As everyone expected, the Federal Reserve's Open Market Committee decided not to change interest rates. Everyone's focus will be on the statement accompanying the decision. It's a nuanced statement that definitely emphasizes the danger of inflation over than the danger of recession. Downside risks to growth have "diminished" while upside risks of inflation have "increased." Household spending is "firming." There was one dissenter, Richard Fisher, who would have raised rates now. The language regarding Financial markets remains unchanged: they're under "considerable stress."

Our takeaway: On the one hand, the statement at least shows that the Fed is well-situated in the reality based community. On the other, Bernanke is going all Greenspan. Interest rates are going up but no one knows exactly when. Leans earlier rather than later, maybe as early as September. With Barack Obama blowing away John McCain in the polls, the Fed probably doesn't have to worry about raising rates before the election. If the election looks inevitable anyway, you don't worry about influencing its outcome. This should be a positive for the dollar's strength since it shows that the Euro isn't the only currency looking toward higher interest rates.

But what do we know? Give us your interpretation in comments. Full statement after the jump.

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.