As expected, the U.S. Federal Reserve Board kept interest rates unchanged today at 1.75%, but it moved its bias to neutral.

No one expected a rate change, until more convincing economic data comes in. But observers were split over whether the Fed would move its bias to neutral or not.

The Federal Open Market Committee’s statement said, “The economy, bolstered by a marked swing in inventory investment, is expanding at a significant pace. Nonetheless, the degree of the strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain.”

The statement noted that although the stance of monetary policy is currently accommodative, the Fed believes that, for the foreseeable future, “against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are balanced with respect to the prospects for both goals.”

Bank of Montreal economists note that the Fed’s press statement went to great lengths to emphasize that rates are unlikely to rise in the near term. “It noted that a ‘marked swing in inventory investment’ is partly at play in the economy’s turnaround. For the recovery to be sustained, demand will need to remain firm in coming quarters, a prospect which ‘is still uncertain’.”

RBC Financial Group says, “There is currently nothing in the economic picture to change our view that rates will remain steady until the third quarter, unlike some market-watchers currently expecting a hike as early as June.”

TD Bank is a little more hawkish, saying that it expects “the data will continue to suggest solid economic growth, which will have the U.S. economy absorbing excess capacity at a fair clip by 2003. Hence, the neutral directive in today’s communiqué will likely shift fairly quickly to one where inflation poses a greater risk down the road.”

TD puts itself in the early hike camp as a result, calling for the Fed to start moving interest rates to a more neutral setting, beginning with a 25 basis point rate hike at the June 25/26 meeting. “Over the next few months, core inflation will be driven higher by the enduring strength of service-sector prices combined with the end of discounting in the goods sector as demand continues to firm up. Thus, to ensure that core inflation returns to the more desirable 2.5% pace, the Fed will need to take the preemptive action of raising interest rates this year,” it says.

BMO adds that for the first time today’s press statement announced the vote outcome of the Federal Open Market Committee. Previously, the results were reported to the public when the minutes of the meeting were released, usually about six weeks after the meeting. “Today’s results showed a unanimous 10-0 vote for steady rates. The lack of dissension may weigh in favour of rates remaining steady at the next FOMC meeting on May 7. However, we still expect rates to begin rising at the June 25/26 policy meeting,” it says.