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Fed leaves interest rates unchanged

With Wall Street looking for any clues that tighter policy is coming, the Federal Reserve on Wednesday declined to raise interest rates or provide any clues about when a hike is on the way.

In a move widely expected on Wall Street, the U.S. central bank's Open Market Committee kept its key funds rate near zero. There had been some anticipation the FOMC would provide at least few code words indicating that it was ready to move, but there was scant evidence in the post-meeting statement.

Market reaction was generally positive though not decisively so.

"On the margins it was very upbeat on the economy, much more so than I think is warranted—a little too liberal with the use of the term 'transitory' with respect to commodity prices," said Greg Peters, senior investment officer at Prudential Fixed Income. "I viewed it as slightly more hawkish than anything else."

The Fed characterized economic growth as moderate but said inflation indicators "remain low." The committee noted that "business fixed investment and net exports stayed soft." However, the FOMC characterized job gains as "solid," something the market interpreted as perhaps hawkish for the future of rate hikes and keeping September in play for a move.

"The Fed did not put itself in a position where it had to hike at the next meeting," Dan Greenhaus, chief strategist at BTIG, said in a note. "There is plenty of time between now and the September meeting for FOMC officials to prepare markets for a September hike."

Janet Yellen
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Janet Yellen

Futures traders, though, slashed their bets on September, dropping the chance from 19 percent to zero, according to the CME Group's FedWatch tracker.

Read MoreA 0.1% Fed rate hike? Some think it could happen

As things stand, it gives both the Fed two more months to weight the data on which it professes to be dependent for its next move, and for the markets to stress over what the Fed will do.

"It's just 25 basis points and I think it's important to put it into perspective," said Anika Khan, senior economist at Wells Fargo. "Of course the Fed will still be very much accommodative. If we look at the Fed's balance sheet, that continues to be at an unprecedented high level and so that means the Fed is still going to be accommodative

The Fed had not raised interest rates in more than nine years and had been keeping its key funds rate near zero since late 2008, in an effort to breathe life back into an economy suffocated during the financial crisis and the accompanying Great Recession.

In addition to keeping rates low, it had instituted three rounds of quantitative easing, a monthly bond-buying program that pushed its balance sheet to $4.5 trillion and helped drive a 210 percent gain in the S&P 500 stock market index.

In the interim, the Fed had been looking for signs that the jobs market reached full employment and the economy was generating positive inflation. Though the inflation pace remains tepid, the unemployment rate has dropped to 5.3 percent and recently there have been signs of wage pressures.

Market participants do not expect a rate hike until December, with a 57 percent chance, up slightly from 55 percent prior to the Fed announcement.

The likelihood that the Fed would spring a surprise on the market appears remote to most observers.

"We've been at zero for so long. We're just entering kind of a new phase and nobody's sure how investors are going to react," said Carl Tannenbaum, chief economist for Northern Trust who formerly led a risk analysis team for the Fed. "If the Fed springs a surprise, then their chance of keeping things in good order are diminished."

There were no dissenters to Wednesday's statement.