The Fed downgraded its assessment of the the economy, saying that data is showing the pace of recovery in output and employment has slowed in recent months. Much of the statement of the economy remained unchanged, with the end saying that the the pace of the economy recovery is likely to be more modest in the near term than had been anticipated.

A gloomier Fed outlook was expected by most traders and investors, with the main question remaining what the Fed would do about it.

The Fed answered this question by saying that they will keep its portfolio of securities at current levels by reinvesting principal payments from agency debt (mortgage-backed securities) into longer-term treasuries.

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.

Equity and bond markets responded by paring earlier losses in stocks and by sending yields lower. In currency markets the news satisfied Dollar bears, who proceeded to sell the pair after buying it prior to the FOMC announcement over the last two days.

How much meaningful impact this change in porfolio strategy by the Fed will have remains to be seen. But, at this point the Fed is left without too many options, and right now the market will take this as a sign that the Fed is trying to ease monetary policy.