Today the Federal Reserve left interest rates near zero, but in the August 12 FOMC statement text the Fed suggested that the economy is “leveling out.” The FOMC pointed to improved conditions in financial markets and household spending stabilizing as key indicators that the  economy may be getting back to a slightly more stable state. The FOMC did note that it expects conditions to warrant the extremely low levels of interest rates for quite some time in the future.

Maybe the biggest surprise of the statement was the fact that the Federal Reserve announced it will be ending its buying of treasuries in October. The plan is for the Federal Reserve to gradually purchase $300 billion more in treasury securities before allowing the buying program to end at the end of October.  This is seen by many as an encouraging sign that the Federal Reserve believes the market may be able to stand on its own now.

It remains to be seen whether the economy leveling out will be good enough for the markets in short-term. In the long run there is no doubt that the economy will have to start expanded at a solid pace again if the solid run in the stock market is going to continue. The expectations for an improvement in the economy have caused the run up in stock prices, but even signs of a delay in that improvement could send the market tumbling.

Right now the news is pretty good from the Federal Reserve, but we must keep the economic situation in the correct context. Based on the data they are seeing they believe that the economy has stabilized to a point where they can allow the market to act on its own, but they also believe interest rates must stay extremely low because of the continued weakness in the labor market and consumer spending. The next few months are going to be extremely crucial for the overall direction of not only the American economy, but the global economy as well.