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For months now, the hype surrounding the conclusion of the Federal Open Market Committee’s (FOMC) two-day meetings has been far less about a possible change to the Federal funds rates, than it has been about the short statement that follows.

Today’s conclusion certainly continues that trend. While we weren’t expecting much of a change in the FOMC’s statement from their September release, we were in fact keeping our eyes peeled for any subtle changes to how the Fed addressed economic conditions. Their stance that the current climate is “likely to warrant exceptionally low levels of the federal funds rate for an extended period” remained unchanged, and the target for the Fed funds rate remains between 0 and 1/4 percent.

Minutes ago, the Federal Open Market Committee (FOMC) released a statement following their two-day meeting, which solidified most of, if not all, analysts’ expectations.

MBS/Debt Purchases Extended

Perhaps the biggest development was that the Fed announced that they will ease their purchases of mortgage-backed securities and agency debt by the end of the first quarter of 2010, not by year’s end as previously stated. Conforming rates should remain low for a while yet, but the Fed’s reduced demand might serve to nudge rates up. The decision to push their exit strategy back signals that private markets may not quite be ready to operate on their own by December.

The release following the conclusion the Fed’s Federal Open Market Committee (FOMC) meeting today revealed the Fed’s plans to begin winding down one of their many facilities (emphasis added):

…the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.

As expected, the Federal Open Market Committee (FOMC) announced that the target for the Federal funds rate will remain between 0-0.25% “for an extended period.” The FOMC also reiterated their commitment to spend up to $1.25 trillion on Fannie and Freddie mortgage-backed securities in order to keep conforming rates inside their current range.

Our “prediction” post this morning speculated on whether or not the FOMC would discuss a possible exit strategy. In exactly the same language as their release after the April meeting, today’s statement said, “The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.”

Borrowers, you may have noticed that the lower cost of credit engineered by the Federal Reserve is not necessarily being fully passed on to variable rate borrowers — including those with Home Equity Lines of Credit (HELOC). The reason has been a fairly new phenomenon known as interest rate floors.

“Just as ceilings create a top possible rate, floors are a bottom limit on how low the interest rate can go,” said HSH Vice President Keith Gumbinger. Not all lenders have adopted floors, and they typically don’t exist in older contracts (before 2003).

As expected, the Federal Open Market Committee (FOMC) concluded their two-day meeting yesterday by leaving the target range for the federal funds rate at zero to 0.25%.

Despite the expectations and strategies largely expected from the committee, there were a few aspects of the Fed’s initial press release following the meeting that stood out to me.

(1). The Fed plans to not only continue purchasing debt and mortgage-backed securities (MBS) from Fannie and Freddie, “it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant.”

As expected, the Federal Reserve cut its key short-term rate yesterday; the Federal Funds rate is now a scant one-quarter of one percent. The Prime Rate is down to 3.25% — its lowest point since 1955.

What does it all mean? Our own Keith Gumbinger analyzes the move:

The Federal Open Market Committee concluded their meeting today by announcing that the new target for the Fed Funds rate will be between 0 and .25%. The Fed now has very little ammunition left to correct monetary policy through future Fed-Fund rate cuts.

As expected, Fed Chief Bernanke announced that economic conditions had “weakened further,” and that since “inflationary pressures have diminished appreciably,” the central bank was able to use most of the little ammo they had left.

When it comes to the stock market, investors have been walking on egg shells, cautiously anticipating how to play the volatile ups and downs that come with every new economic or business report, government initiative, or speculative action. For that very reason, the Federal Open Market Committee meeting that’s set to wrap up today at 2:15p.m., may result in a rate cut anywhere from a half to a full percentage point (any cut less than a half of a percentage point has already been forecast as a major disappointment) in order to keep up with the market’s expectation.

Yet, there are some strong arguments that suggest a rate cut would not bring the desired boost to the market that many have anticipated. Some investors have attributed yesterday’s 11% boost to the anticipation of a Fed rate cut — that positive sentiment may no longer persist. Also, investors are quick to the idea that a trimming of Fed Funds rate (already at a low 1.5%) means little impact on consumers:

Ask yourself this: “What is the benefit of a more sizable rate cut in this current environment?” asked HSH Vice President Keith Gumbinger. Within the last couple of weeks the Fed has implemented several programs to jump start the natural flow of things, including an emergency rate cut. We think that the Fed needs to give their programs more time to work before they use up the last of their little-remaining ammunition to battle market conditions.

The Federal Open Market Committee began a meeting today that carries over into tomorrow when Fed officials in charge of setting monetary policy will decide whether or not to trim the already slim Fed Funds rate.