FED Leaves Rates Near Zero; Econ Outlook Improved

THE EVENT:

U.S. Federal Reserve policy makers Wednesday left the target federal-fundsrate for interbank lending in a range near zero and the discount rate at 0.5%while signaling they might increase the size of programs to buy mortgage-relatedand Treasury securities if needed to keep borrowing costs down and ease theeconomy's path out of recession. The announcement came at the end of a two-daymeeting.

THE DETAILS: The Federal Open Market Committee voted unanimously to keep the target federalfunds rate for interbank lending in a range between 0.0% and 0.25%, where it hasbeen since December. Officials reiterated their pledge to keep rates"exceptionally low" for an extended period. Both rate decisions were universallyexpected by Wall Street economists. Officials also gave a nod to some signs of stability in the economy, echoingrecent remarks by Fed Chairman Ben Bernanke and top White House officials, butstressed that conditions are likely to remain weak. "The economic outlook has improved modestly since the March meeting," thoughit should remain weak "for a time," the FOMC said in a statement. "The pace ofcontraction appears to be somewhat slower," the FOMC said, and officials notedthat consumer spending "has shown signs of stabilizing but remains constrained"by job losses, lower home values and tight credit. The Fed repeated that inflation will remain "subdued" and that it sees somerisk that inflation may stay below rates that best foster economic growth andprice stability. The FOMC wasn't expected to announce major policy steps, as they did on March18, when they presented plans to buy as much as $300 billion in Treasury bondsto keep other interest rates low.

THE REACTION:

Stocks, which were up sharply before the announcement, rose further after theFed's release, with the DJIA closing up 168.78, or 2.11%, at 8185.73. The S&P500 finished the day up 18.48 points, or 2.16%, at 873.64. The NASDAQ Compositeened up 38.13 points, or 2.28%, at 1711.94.

Treasurys prices mostly sank at the long end amid disappointment over a lackof any new action. The 10-year yield rose to 3.10%. The 30-year yield rose to4.03%.

The dollar was generally higher after the Fed said it might increase the sizeof programs to buy mortgage-related and Treasury securities WHAT THEY'RE SAYING:

-The Fed still sees green shoots and believes the U.S. economy will begin torebound later this year, says Sherry Cooper, chief economist at BMO CapitalMarkets. "The Fed also feels inflation will remain low despite its running theprinting presses and despite massive fiscal red ink," she says.

-"It's not over the top, but certainly hopeful," Stephen Stanley, chiefeconomist at RBS Greenwich Capital, said of the FOMC's statement that the U.S.economic outlook has improved modestly.

-"Emphasizing the timing of such purchases is a warning to market participantsto expect either accelerated purchases or more aggressive purchases whenconditions warrant," Tony Crescenzi, strategist at Miller Tabak, said of theFOMC's statement that it will continue to evaluate the timing and amounts ofsecurities purchases.

-With the Fed announcement past, the Treasury market can now focus on themassive amount of supply coming next week, said Sean Simko, head of SEI fixedincome management, and given supply, yields are likely to continue to pushhigher.

DOW JONES COVERAGE OF THE FED DECISION:

=WSJ:Fed To Continue Aggressive Efforts To Revive Fincl System 2nd UPDATE: Fed Leaves Rates Near Zero; Outlook Has Improved US Stocks Rally Continues After Fed Statement

=Treasurys Fall, Dollar, Stocks Gain As Fed Turns Slightly Upbeat

=WORLD FOREX: Dollar Falls Vs Most Despite Less Downbeat Fed

=FED WATCH: FOMC Meeting Sign Of Somnolent Times To Come CREDIT MARKETS: Debt Markets Gain On Fed's Positive Turn

=POINT OF VIEW: Stock Market Takes Fed As Best Of Both Worlds

=OFF THE RUN: On The Path To Higher Yields

=Treasurys Prices Drop, Yields Hit Year Highs On Fed Statement