The U.S. Federal Reserve raised interest rates by a quarter point on Wednesday and signaled a faster pace of increases in 2017 as the Trump administration takes over with promises to boost growth through tax cuts, spending and deregulation.
KEY POINTS:* FOMC forecasts suggest 3 hikes in 2017 vs 2 from September projections
* Longer-run FOMC target rate seen around 3.0 pct vs 2.9 pct in September projections
* FOMC statement: "Market-based measures of inflation compensation have moved up considerably but still are low"
* FOMC statement: "The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation"
* Vote was unanimous
MINH TRANG, SENIOR FOREIGN CURRENCY TRADERS, SILICON VALLEY BANK, SANTA CLARA, CALIFORNIA:
"She basically came out to support the rate hike today. She is also giving a guideline for 2017 with possibly three rate hikes. This is a vote of confidence on the economy that's strong enough to support another rate hike. It paints a supportive picture for dollar. The dollar has been strong for the last 30 days. That's been the dominant move. Today that trend continues. The press conference is tempering the initial enthusiasm from the statement. More fiscal stimulus and more rate increases will create a stronger dollar but we are looking pretty far ahead. You are seeing more of a weakness against the yen at this point. I wouldn't be surprised to hear about the parity chant again on the euro with anti-establishment wind blowing there."
LUKE BARTHOLOMEW, INVESTMENT MANAGER, ABERDEEN ASSET MANAGEMENT, LONDON:
"The Fed has finally delivered a second rate hike a year after the last one in this cycle.
"What's more interesting is their guidance on where interest rates might go from here. This time last year the Fed turned out to be wildly off mark in what they were predicting. But this year there are reasons for thinking the Fed's guidance is more realistic. The economy is in a more advanced stage of recovery and market pricing reflects this. We can expect rates to slowly climb through next year and beyond."
"Trump is the big known unknown. The Fed is currently agnostic about the impact his policies will have. But that's partly because neither they, or any of the rest of us, knows what they'll be. If there is a large fiscal stimulus then this will almost certainly create inflationary pressure that the Fed will have to fight by raising rates. It's far from clear how big any stimulus will be and what impact it will have. The Fed is as much in the dark about this as the rest of us."
JASON WARE, CHIEF INVESTMENT OFFICER, ALBION FINANCIAL GROUP, SALT LAKE CITY, UTAH:
"Last time we had a hike a year ago what it meant for markets was volatility and downside. Is the same thing going to happen this time? Nobody knows for sure, but I think what we can take from this is that the market is taking it in stride, we're not seeing a big selloff, not too big of a deviation from what was happening in the market before they made the announcement. Looking at it on a one-day basis, kind of the reaction you'd expect: bit of volatility in the equity market, kind of a flat reaction, bond prices down, yields up, dollar up a little bit, gold down a little bit."
"What was perhaps a bit of a surprise was the forward guidance on the dot plot. They were expecting two prior to this, they're now saying three expected for 2017, so maybe that could be read as a bit more of a hawkish tilt on the Fed policy looking out over the next 12 months.
"If you got back a year ago they were expecting three or four hikes in 2016. We got one. Reading too much into that I think would be kind of a fool's errand. But the market reaction right now is, hey maybe they're a touch more hawkish than we expected going into the meeting."
DAVID SCHIEGOLEIT, MANAGING DIRECTOR, U.S. BANK PRIVATE CLIENT RESERVE, LOS ANGELES:
"The initial reaction is it was pretty much as expected across the board, even the statement. The only change we really saw was from September they have upped their prediction for the number of hikes from two to three. That is really not that big of a surprise, the market did a good job getting ahead of the curve on that. So we will wait and see what comes out in the press conference but just from the statement there wasn't a lot of surprises."
"Whenever we get these policy statements in the minutes afterwards we always see a lot of volatility (in stocks) so I don't read too much into it. However, I'm beginning to think the market might be looking for an excuse to take some profits. We've had such a strong run here for the past couple of weeks that any excuse to take some money off the board might hold a little bit more water than usual. That could be what we see here and heading into the close."
The economic projections don't "surprise me especially, on the employment side since we have had some pretty decent numbers here for the past several quarters. So them coming down on that doesn't surprise me a whole lot, that just tells me they feel in terms of the employment number they are fairly positioned and a little bit ahead of the curve. This statement, everything I have read so far is almost a yawner, it really is very much in line across the board with what the market seemed to be expecting and what we were expecting. So even their move from two to three (rate hikes) is not much of a surprise."
FRANCES DONALD, SENIOR ECONOMIST, MANULIFE ASSET MANAGEMENT IN BOSTON:
"All elements we've received so far from the Fed including the policy statement, the forecasts, the dot plot tilt hawkish. They imply that the Fed sees more room to run with interest rates higher given the Trump election."
"Yellen's challenge will be to tilt the press conference more dovish in order for today to be seen as a balanced statement. The U.S. dollar is strengthening aggressively and bond yields are rising more sharply than would be justified by interest rate hikes alone. If the fed appears overly hawkish it will restrain growth in 2017 which is problematic given that the impact of Trump policies is more likely to be in 2018."
"It appears the Federal Reserve is removing the punch bowl for equities more quickly than we initially thought. How equities end the day will depend heavily on the tone Janet Yellen uses in her press conference. How she explains this hike, whether its dovish or hawkish, will matter considerably to markets for 2017."
AARON KOHLI, INTEREST RATE STRATEGIST, BMO CAPITAL MARKETS, NEW YORK:
"It's a little bit more hawkish than expected. They moved up the dots a little bit more aggressively in the near-term and their near-term projections for GDP. There was a dot plot change that was a little more aggressive than anticipated. Changing the near-term means you are more certain that you will have a little more rope to go, they didn't move any of the longer-term stuff so maybe that confidence isn't supremely high, but certainly it's improving for them. The real question is whether this is caused by the continuation of economic growth or whether it's really the result of any new data we've received, specifically on fiscal stimulus. They didn't mention the fiscal stimulus but typically their aggressiveness does indicate that there's a little more confidence that they can get away with three hikes next year."
DOUG DUNCAN, CHIEF ECONOMIST, FANNIE MAE, WASHINGTON:
"They haven't overreacted to the move in rate structure since the election. They are taking a wait-and-see attitude. They raised the target rate as expected. I don't see any changes in their central tendency forecasts. At least right now, nothing has changed in the economy except for expectations. We are going to see bigger pullback in refinancing even if mortgage rates stay at the current levels. I expect home sales to be dented in the early part of the year with rates moving up so much as quickly. I think the homebuilders will keep going since there's still a shortage in supply even if demand slows from these higher rates.
"If we see another 40 basis point increase in mortgage rates, the drag on housing activity would be significant. It remains to be seen how (fiscal) policies would affect economic activity in the second of the year. It would matter in what order these policies would be enacted. This is the third longest economic expansion on record but it's getting long in the tooth."
HEIDI LEARNER, CHIEF ECONOMIST, SAVILLS STUDLEY, NEW YORK:
"It's not too exciting. The only real thing is that they are basically pricing in an extra rate hike in 2017.
"They didn't take out the use of 'gradual.' So that suggests that even if things do start to indicate that there are some inflationary pressures, it's unlikely that they're going to try to get ahead of the curve. There'll be plenty of time for raising rates as needed.
"My question is what changed if they didn't change their GDP, employment or inflation forecasts? Their inflation is completely unchanged. GDP they increased by 0.1 percent for 2017, unemployment they brought down by one-tenth, so to me that's not enough to warrant an extra hike. It could just be again, this is the composition of the FOMC's members own views, so perhaps more of them are indicating the risks of inflation are there. But it's a little bit surprising without the corresponding change to their forecasts."
SHAHAB JALINOOS, GLOBAL HEAD OF FX STRATEGY, CREDIT SUISSE, NEW YORK:
"Not entirely surprising I would say. It's an argument for modest dollar strength, but not necessarily in and of itself going to change the bigger picture. Obviously the market now still has to listen to what Chair Yellen says. Simply looking at the statement, they make it very clear that they think the labor market conditions are going to strengthen further, that the economy will continue to expand, at what they call a moderate pace."
"If you throw into the mix the possibility of Trumponomics, clearly that's another aspect to consider, but it's not something that has been referenced specifically in the text of the statement. The game was higher U.S. yields, which has been in place for some time, a higher dollar against core defensive currencies like the euro and the yen, and that trend persists. So in that sense, the game hasn't changed."
COLLIN MARTIN, DIRECTOR, FIXED INCOME, SCHWAB CENTER FOR FINANCIAL RESEARCH, NEW YORK:
"In a nutshell the decision to hike rates was expected by us and expected by the market, so no surprise there. Very few changes to the economic projections, which we also expected. It seems like they'll probably wait to get new information from the new administration to get more details before they make any changes to their economic projections. So no surprise there."
"We were a little bit surprised about the increase in the dots. That was a little bit more hawkish than we expected, and it looks like the market is taking that in stride as well. It's a little bit more bearish for the Treasury market than we had anticipated and we're seeing that with yields across the curve up a few basis points. I guess in a nutshell this is a little bit more bearish for the bond market than what we had expected."
DAVID JOY, CHIEF MARKET STRATEGIST, AMERIPRISE FINANCIAL, BOSTON:
"It was little more hawkish than the market was expecting although the initial reaction to stocks was up. The Fed went to three rate hikes next year versus two, that is consistent with what we are expecting for next year, but it probably comes as little surprise to the market place. You see it reflected in fixed income now, the 2-year (Treasury yield) is up to 1.21 percent and the 10-year is at 2.49 percent so bonds are selling off in response to this, not yet so for stocks but stocks may turn negative on this news."
The FOMC's economic projections are "moving in our direction, we are looking for as much 2.5 (percent GDP growth) next year, they are at 2.1 (percent), it is up a little bit. I suspect they are taking a little bit of a wait-and—see approach to some changes from the new administration than we are in baking some things in. Nevertheless this is in recognition that the economy is already behaving better than it was when they met in September or they met in November, so they are kind of catching up a little bit. If they didn't acknowledge that they risked maybe falling behind the curve a little bit so I applaud them for moving in this direction. Especially in light of some commentators saying they would be very dovish and lay low and stay out of the new President-elect's way. They chose to talk about and do exactly what they say the data is telling them."
TOM PORCELLI, CHIEF U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK:
"It's critical to understand why the dots shifted, if you look at the average of the dots they moved very little. In 2017 they moved 6 basis points. Basically what happened is someone in the lower tier of the dot plot shifted higher, and that's basically what moved the median. It's important to note that the average shifted very modestly. It doesn't indicate that they are looking to ramp it up. Someone who had thought that they are going to have very middling hikes over the coming year has just shifted and that's basically the bottom line."
STOCKS: S&P 500 now about 0.75 pct lower; Dow down about 0.6 pct; Russell 2k
BONDS: 2- and 10-year Treasury yields move higher; 2-year yield at 1.26 pct to the highest since August 2009; 9 basis point rise the largest since Feb 2015; 10s just above 2.53 pct
RATE FUTURES: December 2017 Fed fund futures fall 10 basis points to the lowest since January
FOREX: The dollar index rises to near the highest in 13 years, led by gains against the euro and Japanese yen
(Americas Economics and Markets Desk; +1-646 223-6300)