May 2, 2018 / 6:16 PM / 5 months ago

Instant View - Fed holds rates steady, confident in inflation outlook

(Reuters) - The Federal Reserve held interest rates steady on Wednesday and expressed confidence that a recent rise in inflation to near the U.S. central bank’s 2 percent target would be sustained, leaving it on track to raise borrowing costs in June.

KEY POINTS:

- FOMC statement expresses confidence that inflation will hold near the 2 percent policy goal

- FOMC statement describes 2 percent target as “symmetric”

- FOMC statement downplays recent slowdown in economic and job growth, points to average strength of data over recent months

- FOMC statement says risks to the outlook roughly balanced, removes reference to ‘near-term risks’

- FOMC statement makes no reference to recent turbulence over trade

- Vote on policy was unanimous

CARY LEAHEY, SENIOR ADVISOR, DECISION ECONOMICS, NEW YORK:

“The dropping of the phrase about current conditions, that the economy was no longer strengthening, essentially admits a soft patch in the first quarter without calling it that.

“When they talked about inflation moving close to 2 percent, they are recognising reality, but they introduced the notion of the symmetric inflation target so that they would be able to allow it to move above that, which is a hint to the market place that there will be a pickup in inflation and then wind down in about three months and they don’t want the market to overreact to that.

“The dropping of the boilerplate phrase, the committee is monitoring inflation developments closely. Dropping that, I’m not quite sure what they are trying to tell us from that, but I think they are suggesting they will allow inflation to move higher. In other words, they won’t overreact to inflation in the near-term.”

LEO GROHOWSKI, CHIEF INVESTMENT OFFICER, BNY MELLON WEALTH MANAGEMENT, BOSTON:

“Following Monday’s release of the PCE number there was some concern today could be a little bit more hawkish. I view this as a sigh of relief that we didn’t really get a hawkish statement. Rather we basically received a reaffirming of what many of us had said, the market’s moving closer to the Fed’s 2 percent target and we all expected them to say that and they did.

“The key word we’re focusing on here is ‘symmetric’ with the Fed saying it’s just as likely that inflation could moderately exceed the 2 percent target. But cutting to the chase, we found the statement to be not at all hawkish. It was a reaffirming statement that basically said we continue to be on a path of gradual tightening and to us that means a virtual certainty that June will be in the cards and likely September. The question mark remains around three hikes or four? We’re assuming it’s three.”

ART HOGAN, CHIEF MARKET STRATEGIST, B. RILEY FBR, NEW YORK:

“The Fed statement lines up pretty much with expectations. Since we just had the PCE report, we knew pretty much what they were looking at in terms of getting closer to the 2 percent goal. So they changed the language a little bit on that. The statement spoke to the fact that as opposed to moving up in the coming months, they spoke to it being close.

“They also spoke to wage price pressure not quite being where they’d like to see it and that kind of leans to the benign and that something we know as well.

“When we think about what consensus looks like for the rest of this year we’re still at 3 (hikes) — the one we already had, one in June and one in September — and the consensus hasn’t moved toward that fourth number, which there was some talk about as early ago as February.

“So to me this is a Fed meeting that’s come and gone without much of a dust up in terms of being outside of expectations and I don’t think it’s going to move the markets that much.”

MICHAEL PURVES, CHIEF GLOBAL STRATEGIST, HEAD OF EQUITY DERIVATIVES RESEARCH, WEEDEN & CO:

“This doesn’t necessarily tell us a lot. There is a nudge here that he (Fed Chair Jerome Powell) is a little bit more flexible than he might have looked earlier this spring. You are seeing that reflected in risk markets a little bit.”

“It seems like there’s a little bit more of the Janet Yellen of 2016 and 2017 in this commentary, but again nothing earth shattering one way or the other.”

STEPHEN STANLEY, CHIEF ECONOMIST, AMHERST PIERPONT SECURITIES, STAMFORD, CONNECTICUT:

“It’s typical they don’t make major changes in statement without the benefit of a press conference. There are some changes in the statement to reflect the evolution of the data especially in their inflation outlook. I think a June rate hike is a done deal unless something dramatically changes between now and June. The Fed has pretty much ratified it (a June hike) today.”

STEVEN VIOLIN, SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER, F.L. PUTNAM INVESTMENT MANAGEMENT COMPANY, WELLESLEY, MASSACHUSETTS:

“In many ways this is a no surprise event. It was notable they changed the language very slightly around inflation which is where the market’s focus has been, acknowledging that is ‘close to target’ and emphasizing twice the target is ‘symmetric.’ Meaning that should give them some flexibility in terms of tolerating an overshoot in inflation which is beginning to look like a relatively likely event. A modest overshoot would be tolerable as a modest undershoot on inflation.

“On the growth outlook, really kind of brushing off surprises that have happened since the last meeting, both positive and negative. They referred to the labour market as still strong, that is the exact same word they used last time and particularly strong on average, sort of brushing off the weakness in last month’s labour report. They also referred to the growth outlook as still moderate, same language they used in March despite GDP growth coming in better than expected. On the growth outlook I would view this as they are really brushing off some of the noise and data that has come out since the last meeting and trying to keep the focus on the inflation outlook where they are just buying some flexibility.

“The market is not making a big move because this is basically as anticipated. The ability to tolerate a bit of an overshoot on inflation, perhaps there is a dovish tilt but there is no dramatic change in policy here nor was one expected given there is no press conference with Chairman Powell and no new forecasts being published.”

MARK MCCORMICK, NORTH AMERICAN HEAD OF FX STRATEGY, TD SECURITIES, TORONTO:

“Markets are pretty much focused on the symmetric language, that’s kind of code for willing to let them overshoot their inflation target, so that means they’ll probably run behind the curve a little bit, let the economy run hot, so the implication is you get lower real rates and you get less tightening coming through. So on margin that language kind of sets us up for a dovish backdrop over the coming months. It keeps the nominal rates story in place but what it means is that as inflation rises they don’t actually try to drive the expectations higher of where the rates are now. So if you have three hikes priced in and inflation’s at 2 percent, right now they are less likely to add more hikes even if inflation’s rising.”

“If inflation moves higher and they don’t respond to it they are essentially keeping the accommodation in the economy the same. That’s negative for the dollar because currencies at this stage with inflation starting to rise, and we have difference valuations that are being challenged, the dollar needs higher real rates to essentially pull in the funding from the rest of the world. If the Fed’s going to run low real rates, that’s really going to be reinforcing the global reflation narrative. The central banks are headed in this direction, that’s the takeaway ... the Fed is now the global leader and they are using the language that indicates they are comfortable with that overshoot. Its slightly new information though I don’t think the concept is new. They could be setting the market up for a policy change over the next 6 months where they keep hiking rates but they don’t hike as aggressively as you’d expect if inflation starts to go above 2 percent.”

MICHAEL ANTONELLI, MANAGING DIRECTOR, INSTITUTIONAL SALES TRADING, ROBERT W. BAIRD, MILWAUKEE:

“The statement we saw reads dovish on the potential for a fourth rate hike for 2018 but that could change. The meeting in June and September have hikes priced in. The whole thing is about the fourth rate hike.”

“Investors are still digesting the statement. Algos read headlines and try to predict where the market’s going to go. As real humans digest it then they start to make decisions on what they’ve read.”

COLLIN MARTIN, FIXED INCOME STRATEGIST, SCHWAB CENTER FOR FINANCIAL RESEARCH, NEW YORK:

“They’re all kind of reacting in unison, in that it had a slightly dovish tilt to the language. It seems like over the past few weeks or so, the markets have been focused on the rise in inflation, and now three of the four main inflation readings are at or above 2 percent. But it seems like the FOMC is not too concerned about that right now. They kind of downplayed the rise in inflation... it looks like they’re going to allow inflation to get above 2 percent and remain above 2 percent for a little while.

“It looks like it maybe calmed some nerves (of investors) who maybe were expecting a faster pace of hikes because of the rise in inflation.”

RANDY FREDERICK, VICE PRESIDENT, TRADING AND DERIVATIVES, CHARLES SCHWAB, AUSTIN, TEXAS:

“I’d call what the market is doing a sigh of relief because we didn’t get an unexpected hike. The only concerns the market had was that there would be a faster rate hike than expected.”

“It was a unanimous vote not to hike. I do think they’re hinting that they might be willing to let inflation run slightly above their target but that’s not a surprise. Most people have been expecting that. The market seems to be seeing it as neutral to dovish.”

JAMIE COX, MANAGING PARTNER, HARRIS FINANCIAL GROUP, RICHMOND, VIRGINIA:

“My initial read of the statement is that the Fed is hitting its targets, which is probably the most important part. It looks like both the employment and the inflation targets are pretty close to being met so that’s a good thing. But I do think the statement did lean a little hawkish. Even though there was no movement in the short-term Fed funds rate, it does seem the Fed is no longer worried about inflation being lower than expectations.”

“There has been a concern throughout the week and throughout the last month or two that inflation would induce the Fed to raise faster than their stated number of increases for 2018, and I think the Fed has basically communicated what it is going to do: raise in a very, very systematic fashion and they’re not going to deviate from that and they can tolerate a little bit higher inflation to make sure they don’t raise rates too fast. So I think that’s one of the reasons why markets are up today.”

JOHN CANAVAN, MARKET STRATEGIST, STONE & MCCARTHY RESEARCH ASSOCIATES, NEW YORK:

“From our reading of the statement, it’s particularly bland. Their outlook is roughly balanced. The fact is that they are not in a rush to raise rates faster. They may still raise rates in June. This has allowed Treasuries to bounce here and the dollar is coming off. The market doesn’t look at this statement as particularly dovish or particularly hawkish. Some people may have braced for a more hawkish statement with the new Fed Chairman Powell, but that doesn’t seem to be case here.”

MARKET REACTION:

STOCKS: S&P 500 .SPX little changed; had been modestly lower beforehand

BONDS: U.S. Treasury yields edge lower, 2s US2YT=RR at 2.50 pct; 10s US10YT=RR at 2.96 pct

FOREX: The U.S. dollar pares gains against the euro EUR= and yen JPY=; dollar index .DXY turns flat on the session

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