Fed holds rates steady, calls first-quarter softness 'transitory'

KEY POINTS:

* FOMC says consumer spending solid, business investment firm and inflation "running close" to target

* FOMC sees first-quarter softness (advance Q1 GDP +0.7 pct) as "transitory"

* No details on balance sheet wind down

COMMENTS:

LOU BRIEN, MARKET STRATEGIST, DRW TRADING, CHICAGO:

"They acknowledged in the first paragraph assessment of the economy that economic activity slowed and core inflation declined, but not to worry about the Fed continuing on its appointed rounds because they figure these things will be transitory and that gradual rate hikes will be the expected path forward.

"The Fed doesn't need the economy to excel from where it is now in order to raise rates further, as long as we've already got an unemployment rate quite low and inflation not far from their target and deflation certainly not a front burner issue. So they want to move the rate higher than where it is given the current conditions, and I don't think they want to take that anticipation off the table just because we've had some slowing data."

OMER ESINER, CHIEF MARKET ANALYST, COMMONWEALTH FOREIGN EXCHANGE, WASHINGTON:

"The market is encouraged by the fact that the Fed sees the slowdown in Q1 as likely to be transitory. I think that signals that the Fed is looking past some of the soft data as likely being either weather related or seasonal or consistent with the trend that we've seen over the years of a surprisingly weak first quarter and typically an improvement in the economy in subsequent quarters.

"That signals that the medium- to long-term outlook for the economy remains positive. It suggests that the trend of improving growth is likely still intact and as a result it means that we'll probably see a Fed rate hike in June and probably again in September. It leaves the outlook for monetary policy largely unchanged, I think, given that they can see past some of this initial weakness.

"With respect to the balance sheet, it was initially a little disappointing that we didn't see any discussion about unwinding the balance sheet, but I think that'll be left until later this year and in all honesty I don't think there were many investors who were expecting much of a debate or discussion on the balance sheet, but we'll have to wait until the minutes come out to see that."

HEIDI LEARNER, CHIEF ECONOMIST, SAVILLS STUDLEY, NEW YORK:

"They specifically said they view the slowing of growth in the first quarter as likely to be transitory. They went out of their way to emphasize this is not something they see persisting and pretty much says to me that their two rate hikes are still on the table for the balance of the year.

"To me if there was any concern about the two rate hikes it's not merited by virtue of the statement here."

RYAN SWEET, SENIOR ECONOMIST, MOODY’S ANALYTICS, WEST CHESTER, PENNSYLVANIA:

"They were not explicit about a June rate hike, but that's the right approach. The Fed is communicating its mantra of gradual rate hikes. The next time they will likely raise rates would be June. They are looking past the weak first quarter GDP but the job market hanged in there. The Fed is concerned the economy will blow past full employment and cause wage growth to accelerate.

"Fed funds futures are showing traders are looking at about a 65-70 percent chance of a rate hike (in June). Those odds are in line with their view. They didn't need to use this statement to signal they need to raise rates in June."

TOM PORCELLI, CHIEF U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK:

"It was a pure marking-to-market of things that were. The soft GDP report, them acknowledging that it's transitory, ie. it's not something that they're concerned with. There's not much to really sink your teeth into here."

MARKET REACTION:

STOCKS: Stocks pare losses. The S&P 500 <.spx> last down 0.23 pct

BONDS: Most U.S. Treasury yields higher, 2s last at 1.30 pct; 10s at 2.31 pct; 2-10 spread flattens to near 101 basis points

FOREX: The U.S. dollar ticks higher against the euro and yen