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.

Just minutes ago the Federal Reserve announced that it will be buying $300 billion in longer-term Treasury Bonds over the next six months in a major effort to help the economy recover. Economists and investment strategists were quite surprised by this move by the Federal Reserve Open Market Committee. In response to this move treasuries, especially intermediate-term treasuries have been bought up quickly as investors scramble to invest in the things that our government is investing in. If you would like to read the full text of the FOMC statement you can here.

Previously many experts believed that the FOMC would hold off on buying treasuries due to the risks of inflation in the future. Clearly the Federal Reserve has decided that it is willing to take the risk of causing inflation over the long run so that it can try to jump start the economy and provide stabilization to the overall markets.

What are the benefits of this major treasury buy on the market? The Fed clearly wants to drive mortgage rates lower and lower credit spreads on loans on balance sheets. This move also shows that the Federal Reserve has another major weapon to use to combat the crisis, when some were worried that they were left with very little to do.

Are there possible negatives to this move? The long-term risk of inflation is there, but it is one that the FOMC is likely not a bit worried about right now, and I can’t blame them. The bigger risk is that this does signal that the Federal Reserve believes that the economic crisis we are currently in is getting worse and worse and they needed to make a drastic move such as this one.

The bottom line is I believe this move overall is a wise one and one that should help in the long run, but the fact that this move had to be made in the first place has to give investors some pause about the state of the economy in the coming quarters.