NEW YORK (Reuters) - The U.S. Federal Reserve held interest rates steady on Wednesday but signalled possible rate cuts of as much as half a percentage point over the remainder of this year, as it responded to increased economic uncertainty and a drop in expected inflation.
STOCKS: U.S. stocks turned higher after the announcement, with the S&P 500 last up 0.36%. BONDS: The 10-year U.S. Treasury note yield fell to 2.0353% and the 2-year yield fell to 1.7678%.
FOREX: The dollar index added to losses and was down 0.44%.
LESLIE FALCONIO, SENIOR STRATEGIST, UBS GLOBAL WEALTH MANAGEMENT’S CHIEF INVESTMENT OFFICE, NEW YORK
“The most dovish part of the statement, even before the Q&A, was the shift in the dot plot. Everybody anticipated that he would remove the word patient from the text. The fact the market was coming in with such strong expectations of a dovish Fed, to actually go above that is quite a feat.”
“They’ve lowered the dot plot. They’ve kept 2019 projections fairly the same but they’ve lowered them quite a bit in terms of 2020 and 2021. You could see this in the market because what we’ve had is a large steepening in the 2s-10s part of the yield curve. The 2 year has come down almost 10 basis points since the Fed announcement. We’ve had a strong drop in the 2-year yield while the 10-year is about 5 basis points lower, nothing that material.”
KRISTINA HOOPER, CHIEF GLOBAL MARKET STRATEGIST, INVESCO, NEW YORK
“First and foremost, investors should be comforted in knowing that the Fed has opened the door to cutting rates in the near term. This was all expected: the removal of patient language, some movement in the dot-plot, but nothing dramatic and some slight changes in the nomenclature in the announcement. For example, moving to moderate economic growth from solid, just slight changes, nothing to cause panic but certainly enough to suggest the Fed is open to a rate cut in the near term.
“I always knew the Fed would be very careful not to alarm in terms of this movement toward dovishness. Jay Powell now has the luxury of cleaning up every Fed announcement in his press conference.”
QUINCY KROSBY, CHIEF MARKET STRATEGIST, PRUDENTIAL FINANCIAL, NEWARK, NEW JERSEY
“The market had not expected a rate cut at this meeting. The instinctive reaction in equities is that this is okay, that they’re fine with the Fed’s move toward watchful waiting and that the Fed will be prepared to act if necessary.”
“In many ways this reflects the commentary from (European Central Bank President) Mario Draghi who yesterday advised that if conditions did not approve they too will act. You have global central banks in a nearly orchestrated positioning, prepared to act if respective economies falter. Clearly the market is embracing it.”
“We still have the press conference to deal with. The press conference has typically been where the market falters. We’ll see if this time it can stay in positive territory.”
KATHY JONES, CHIEF FIXED INCOME STRATEGIST, SCHWAB CENTER FOR FINANCIAL RESEARCH, NEW YORK
“The biggest surprise for me was the number of officials who submitted their forecasts and looking for lower interest rates in 2019. That’s a larger percentage than I had thought. It does show that there is general consensus that we need to move lower. They also change the language is bit. It’s consistent with what the market is expecting. I would say we would see a cut in July and then they might wait a little bit and go again in September, all depending on the trade talks. I think we think depending on how the data look, the yield curve could steepen a bit more.”
JACOB OUBINA, SENIOR U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK
“I think the big surprise was how many folks moved into the cut camp on the Fed side. You had seven members that are now looking for two cuts in 2019, so there’s a lot more asymmetry there than we expected. The language changes in the statement were pretty much as expected, I think everyone expected they would take ‘patient’ out and add some language similar to what Powell said in that speech he gave a few weeks ago, you know, ‘there are increased risks and we are monitoring and we would be willing to do whatever it takes to maintain or sustain the expansion,’ and they added all that language. Not really surprised that Bullard dissented, he had been the one person that had been soft selling the idea of cuts more recently.”
“Maybe this goes to the point that the China trade situation is such a critical pivot for whether the Fed cuts or not.”
JASON DRAHO, HEAD OF AMERICAS ASSET ALLOCATION, UBS GLOBAL WEALTH MANAGEMENT, NEW YORK
“This was a bit more dovish than what people were expecting and that’s evident in how the market responded, especially in terms of interest rates, especially the two-year falling, equities responding positively and the dollar weakening. All consistent with a dovish interpretation.”
“Bullard has always been one of the most dovish members of the committee so (his dissent is) not a surprise...given he is an outlier.”
MARK GRANT, CHIEF GLOBAL STRATEGIST, B. RILEY FBR INC, FORT LAUDERDALE, FLORIDA:
“The FOMC minutes were no surprise. I did not expect the Fed to cut today but they made a significant move indicating, strongly, that at least one rate cut was coming this year, if not more. I think they heeded time to react to the ECB’s new position that rates will be cut in Europe along with a re-start of bond buying or Quantitative Easing. The Fed has not lowered rates since 2008 and I think they are adjusting to the policies of the other central banks with U.S. Treasury yields higher than almost all of the countries in Europe and also Japan. They were also focused on “uncertainties” about both inflation and the economic outlook. The notion of “patience” was no longer part of their thinking. I now think we are in for one, if not two, rate cuts this year as the dot plots have significantly changed to a much more dovish forecast. If the Fed does not lower rates then the dollar is going to strengthen against the euro and other major currencies and have a negative impact upon our economy.
About Bullard’s dissent: “One of the smart people in the room that knows we should be cutting rates now. The ECB’s latest statement and their forthcoming actions put tremendous pressure on the Fed to look out for America as the ECB, the Bank of Japan, and Switzerland are for more aggressive about lowering rates than we are. The central bank of the United States now has to protect American interests.”
“The Fed will go in July. It was notable that there was no reference to global developments.”
KING LIP, CHIEF INVESTMENT STRATEGIST, BAKER AVENUE ASSET MANAGEMENT, SAN FRANCISCO
“It set up the language for one or more rate cuts this year. Unless the G20 meeting is a wild success and everything comes up roses, a rate cut is going to happen this year.”
“It’s bullish, it means there is a Powell put, if you will, that if the trade conflict continues, at the very least you have the Fed behind investors’ backs. That’s positive for stock investors.”
BRUCE MONRAD, CHAIRMAN AND TRUSTEE OF NORTHEAST INVESTORS TRUST IN BOSTON
“The statement seems to be a little more dovish and the dots moved down and that’s pretty dovish as well.
“The Fed has to deliver on what it said it would deliver, they’re boxed into a corner. They don’t want to surprise the market so they’ll probably follow through on what they’re signalling. They old adage was the market shouldn’t fight the fed but the new motto should be the Fed isn’t fighting the markets. I’ll be interested to hear about how (Federal Reserve chair) Powell addresses the yield curve. They would prefer not to have an inverted yield curve, one way to get there is to cut rates.
“In their shoes is very complicated and you could be thinking about ulterior motives. The fear is that they could be caving to Trump and political pressure, they may err on the side of smooth sailing so there will be more traditional type (Fed) nominees.
“The statement talks about risks, but risk is a different thing than actual data. I’m not sure there’s reference to current softness in the economy. It’s more precautionary.
“They’ve made quite a U-turn in the last nine months. It would be interesting to talk about the models they’re using, and the reasons behind that U-turn.”
MIKE LOEWENGART, VICE-PRESIDENT, INVESTMENT STRATEGY, E*TRADE FINANCIAL, NEW YORK
“The word ‘patience’ has been dropped and the word ‘moderate’ has been used to describe the economy. There is also a mixed front on the dot plot perspective. It is in a lot of ways a continuation of the same message we’ve heard the Fed say in the previous month. I would describe this as indicating an incrementally more dovish posture from the Fed.”
“Anticipation of a cut are building, not about how much or not so much when, but the odds have increased for a move in July.”
ERIC DONOVAN, MANAGING DIRECTOR, OTC FX-INTEREST RATES, INTL FCSTONE, NEW YORK
“You have the G20 summit coming up in a week and a half. It’s kind of ridiculous to think that the Fed was going to cut today. There are two really important metrics that are the elephant in the room, one of which is a 3.6 unemployment rate. It’s very difficult for the Fed to cut with unemployment below 4%. It’s very difficult to justify that. The other metric we have to look at is stocks are 1% off all-time highs. So when you have a stock market that’s essentially at all-times highs and you have an unemployment rate below 4%, it’s really, really difficult for the Fed to justify a complete 180 from their position six months ago and start cutting rates.”
BRETT EWING, CHIEF MARKET STRATEGIST, FIRST FRANKLIN FINANCIAL SERVICES, TALLAHASSEE, FLORIDA
“They did exactly what I think the market was expecting them to do. Removed the word ‘patient.’ …. I think that the dot-plot moved to where there would be perhaps up to 50 basis points in cuts by the time we get to 2020.”
“I think it’s right in line with market expectations, puts a July cut in play.”
“2019 is the opposite of 2018. I felt like they were making a lot of wrong moves in 2018, and I feel 2019, they are moving in the right direction every meeting so far this year.”
JOE MANIMBO, SENIOR MARKET ANALYST, WESTERN UNION BUSINESS SOLUTIONS, WASHINGTON
“The Fed leaned dovish as it noted higher uncertainty and more officials saw scope for rate cuts. The jury is out on the impact on the dollar, but coming data on hiring and Q2 growth will be important, along with the Trump-Xi meeting next week.”
“If there had a been a rate cut today I would have been more concerned about the Federal Reserve being pushed around politically than the economy. Looking at the economic data it would be a tough case to cut rates today. We’re still running at really low unemployment rates. The economy is starting to slow but it’s not coming anywhere close to potentially dipping into a recession. It would be premature today to cut rates and even maybe in July. You really need to see more data.”
JOHN AUGUSTINE, CHIEF INVESTMENT OFFICER, HUNTINGTON NATIONAL BANK IN COLUMBUS, OHIO
“We think the Fed delivered. It did no harm. It walked right up to a cut without doing it today. It’ll likely be coming in July, absent some big trade news or other news.”
“It delivered above market expectations. They had all four key phrases the market was looking for: uncertainty’s increased, closely monitoring, muted inflation and moderate economic activity. Now we’ll see how the press conference goes.”
“The interesting part about the press conference is that we finally had a dissent, the first of the Powell era so it’ll be interesting how he reacts to that.”
“We’re interested in what financial and international developments they’re particularly watching.”
SAM BULLARD, SENIOR ECONOMIST, WELLS FARGO SECURITIES, CHARLOTTE, NORTH CAROLINA
“They downgraded their economic assessment on balance. The dot plots have also shifted, signalling it would be appropriate to lower rates somewhere down the road. But it might happen further out than what some people are expecting.”
Americas Economics and Markets Desk; +1-646 223-6300