The U.S. Federal Reserve Board didn’t make any changes to monetary policy Tuesday, and economists don’t expect one until for another year at the earliest.

True to expectations, the Fed left interest rates near zero and its QE2 quantitative easing program to expand the money supply unchanged.

It also didn’t make any major revisions to its accompanying statement, nor did it address the fact that rates have risen since it introduced QE2, which is the opposite of the policy’s intended effect.

TD Economics says, “We expected to see at least a tangential reference to this issue in the after-meeting statement. After all, it is difficult to discern whether yields have risen because QE2 has boosted the growth outlook or because the market is pricing in a greater risk of future inflation.”

National Bank Financial suggests that the Fed didn’t have to address this issue in light of the recent agreement on a tax cut plan, which will provide additional fiscal stimulus. “With the stock market being up 19% on the back of a re-pricing of economic growth since Ben Bernanke hinted at QE2 in August, we do not see the recent backup in bond yields as a failure of QE2,” NBF says.

NBF notes that it will take a few months to assess the economic impact of the fiscal package likely to be adopted by Congress, “we remain confident that the combination of monetary and fiscal policy stimulus will lead to a significant improvement in U.S. labour markets in the coming months. With economic growth at roughly 3% in 2011 and accelerating in 2012, talk of an FOMC exit strategy will be back on the front burner before the end of 2011,” NBF adds.

RBC Economics says that it sees little chance of the Fed implementing rate increases next year. “Rather, we anticipate that, as the economy builds momentum, the process of reducing policy stimulus will begin with the expiry of the asset purchase program, followed by the end of the program of reinvesting the proceeds from maturing holdings and eventually to a move to sell some of the bonds on the Fed’s balance sheet. We look for rate hikes to follow although this is unlikely to start until 2012,” RBC says.

TD says that it believes the central bank will not raise the Fed Funds rate until the third quarter of 2012, ending that year with a target for the federal funds interest rate at 1.00%.

IE