ANALYST: The Fed Edged Away From A September Taper In Today's FOMC Statement

The Federal Reserve's latest FOMC statement is being interpreted as dovish by the bond market, which is rallying in the wake of the 2 PM release.

Miller Tabak chief economic strategist Andrew Wilkinson says that with today's statement, the Fed is edging away from expectations that it will begin tapering the pace of its monthly bond purchases as soon as September.

Wilkinson writes (emphasis added):

Some subtle changes in the format of the ensuing policy statement and on balance it appears that the central bank has edged ever so slightly away from reducing bond purchases. However, when the FOMC last issued its statement it was what Bernanke said in the press conference that mattered. Today, there is no press conference and the sense that easy money is here to stay will likely permeate investor sentiment.

The economy was described as expanding at a modest pace, which we read as a slight downgrade from the June 19 statement when it used the term ‘moderate’. Bernanke was firm in his assertion that future policy change would be data-dependent and the latest statement reflects that point by noting, “mortgage rates have risen somewhat and fiscal policy is restraining economic growth”.

Also suggesting the statement is tentatively backing away from tapering sooner-rather-than-later, is inclusion of heightened concern over the outlook for inflation. This likely accounts for why James Bullard voted with rather than against the committee this month. “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.”

"This is a remarkedly dovish statement in my view with the absence of any tapering language," says Tom Di Galoma, head of fixed income rates sales at ED&F Man Capital Markets. "However, the bond market still has to contend with Friday's jobs report."

Eric Green, global head of rates, FX, and commodities research at TD Securities, says that after the release of today's statement, "tapering [is] a go."

"The precondition for tapering is for economic conditions to firm and the FOMC upgraded those expectations in paragraph 2 in stating that 'economic growth will pick up from its recent pace'," says Green. "That replaced language stating that economic growth will 'proceed at a moderate pace'. Strong signal that preconditions for tapering are being met."