3/16/2010
By Brian Sozzi, Research Analyst

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The Federal Reserve, as expected by many heading in, maintained the "extended period" language in its policy statement.  Initially, the market moved higher on the announcement but then began to sell-off.  Here is the fact; the Fed seemingly upgraded its view of the economy in the statement, and there should be much attention to the language that was altered as opposed to what was left alone.  Additionally, it's obvious that by keeping the "extended period" language that a hike in rates is not in the cards near-term.  We believe the Fed must remove that statement in its statement to properly signal an imminent rate rise.

Key Language Changes

"Labor market is stabilizing" from "Deterioration in the labor market is abating"
* Take: Acknowledges that the prospect for job growth, though not enough to bring the unemployment rate down materially, has strengthened relative to the start of the year.  This is clearly demonstrated in the non-farm payrolls data, and important in that the Fed does not foresee another major downdraft in the jobs market.

Removed "business spending remains constrained by a weak labor market" and led with "high unemployment
* Take: Again a nod to the turn in the jobs market.

"Business spending on equipment and software appears to be picking up" to "Business investment has risen significantly"
* Take: One of the more powerful statements in the release in our view.  Business investment was severely depressed during the Great Recession, and in order for jobs to return and economic growth to be sustained, companies need to reinvest their strong cash positions for future growth.

"Investment in structures is still contracting" to "Non-residential investment is declining"
* Take: A nod to the weakness in commercial real estate market and improved (for now) situation of the U.S. residential housing market.  Perhaps implies there is a need for low borrowing rates in order for commercial property holders to refinance their debt to ward off financial contagion.

Final Note
Our sense, at least at the onset, is that the language by the Fed is another step towards raising rates later this year.  Moreover, there appeared to be stronger language explaining Thomas Hoenig's dissenting (second consecutive dissent) vote, a view that may start to take hold with other Fed voting members in light of a perceived upgrade in the view of economy.

Brian Sozzi
Wall Street Strategies