The U.S. Federal Open Market Committee left interest rates unchanged Tuesday, and economists expect them to stay that way for a while yet as the recovery struggles along.

In addition to leaving rates in the 0% to 0.25% range, the Fed continued its policy of reinvesting principal payments from its securities holdings, but it didn’t unveil any new easing measures. It also didn’t change its economic outlook much.

RBC Economics notes that the Fed’s outlook remains “lacklustre”, although it notes that the Fed did add that the current level of underlying inflation is running “somewhat below those the Committee judges most consistent, over the longer term, with its mandate.”

“The lack of action in today’s meeting suggests to us that the Fed expects extremely low interest rates, and maintenance of excessive liquidity will be enough to sustain the U.S. recovery,” RBC concludes, although it says that the Fed has left the door open to another round of quantitative easing, or other policy measures, if necessary.

TD Economics agrees that the policy statement “makes clear that quantitative easing has not been taken off the table, but that it is not a sure thing either.”

National Bank Financial says that while the Fed did not introduce new easing measures today, “it made an effort to comfort markets in terms of its readiness to act if needed.” That said, NBF adds that is does not detect a sense of urgency in today’s statement.

“Unless the Fed is forced into action by a marked deterioration in economic conditions, we remain of the opinion that a fiscal stimulus package incorporating a credible long-term fiscal plan is the more effective way to tackle current economic challenges. Unfortunately, with the upcoming mid-term elections, we cannot be sure about such fiscal package,” it says. “In this context, we welcome the fact that FOMC expressed its willingness to act alone if needed, providing a ‘Bernanke put’ for the economy.”

TD says that there, “appears to be little consensus within the Fed on whether to go forward with additional asset purchases, which puts the onus on the economic data to either confirm the Fed’s expectations or push them towards further action”; and it adds that the added focus on inflation suggests that this will be the data point the Fed is watching most closely when making that decision.

“Nonetheless, with economic growth likely to maintain at a sub 2.0% pace over the next several quarters, speculation about the Fed doing more to support growth will continue to be on the forefront of the agenda for the next several meetings,” TD concludes.

“We forecast that the U.S. economy will grow at a modest pace for the remainder of 2010 and that growth will accelerate in 2011. Against this backdrop, labour market conditions will slowly improve preventing a sustained softening in prices. To ensure that the recovery continues and inflation returns to levels that are consistent with their mandate, we expect the current range for the Fed funds target to be maintained until the third quarter of 2011,” RBC says.

IE