Fed Doesn't Taper, Maintains Purchases, Sees No Rate Rises Until 2014, Cuts Growth Forecast

The Federal Reserve's Federal Open Market Committee, the policy-setting group of economists, concluded their June meeting Wednesday. At the meeting, the FOMC decided to keep its QE program going at the current pace of $85 billion in purchases per month and views no rate rises until at least 2014.

Tapering Concerns

Tapering concerns were eased in the release as the Fed committed itself to maintain the current pace of purchases at $85 billion per month. The Fed is currently buying $40 billion in mortgage backed securities and $45 billion in government bonds per month and has been since late December.

The Fed did not want to give any sense of monetary tightening this month despite fears that Fed policy has created risks that it will be difficult to unwind its massive stimuli. However, the recent uptick in mortgage rates of about 70 basis points has acted as de facto monetary tightening, according to Credit Suisse, and the Fed most likely did not want to further tighten policy and harm the economy.

Forecast Revisions

The Fed cut its 2013 growth forecast to 2.3-2.6 compared to 2.3-2.8 percent seen previously in March. For 2014, the Fed expects the economy to grow between 3.0-3.5 percent compared to the prior forecast of 2.9-3.4 percent and for 2015, the Fed boosted its growth forecast to 2.9-3.7 percent from 2.9-3.6 percent previously. The FOMC lowered its unemployment forecast and also cut its inflation forecast.

In 2013, the FOMC now expects the unemployment rate to be between 7.2-7.3 percent in 2013 compared to the prior forecast of 7.3-7.5 percent and for unemployment to be between 5.8-6.2 percent in 2015 compared to the prior forecast of 6.0-6.5 percent. PCE inflation is expected to run at between 0.8-.12 percent in 2013 compared to the prior forecast of 1.3-1.7 percent in 2013 and between 1.4-2.0 percent in 2014, down from 1.5-2.0 percent previous.

Bullard, George Dissent

Two of the FOMC's members voted against the statement, for differing reasons. George, a noted hawk, voted against the plan, as she "was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations."

Meanwhile, typically hawkish James Bullard argued for further stimulus. He said that he "believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings."

Markets React Violently

Stocks dived on the news as the Fed cut its growth forecast but maintained its purchases. The Dow dropped 45 points or 0.3 percent before rebounding to trade only marginally lower, as did other major stock indices. Bonds reacted similarly, with yields moving rapidly in both directions.

The dollar rallied as the Fed made better comments about the labor market and lowered its inflation outlook despite maintaining its rate of purchases. The euro fell as low as 1.3335 against the dollar after trading above 1.34 before the release while the USD/JPY spiked above 96. Overall, the dollar was stronger following the release.

Press Conference Eyed

Next up is Chairman Bernanke's press conference at 2:30 pm. Expect questions surround easing/tapering as well as Bernanke's future at the Fed.