NEW YORK (Reuters) - The Federal Reserve raised interest rates on Wednesday, a move that was widely expected but still marked a milestone in the U.S. central bank’s shift from policies used to battle the 2007-2009 financial crisis and recession.
In raising its benchmark overnight lending rate a quarter of a percentage point to a range of between 1.75 percent and 2 percent, the Fed dropped its pledge to keep rates low enough to stimulate the economy “for some time” and signaled it would tolerate above-target inflation at least through 2020.
MIKE TERWILLIGER, PORTFOLIO MANAGER, RESOURCE LIQUID ALTERNATIVES, RESOURCE CREDIT INCOME FUND, NEW YORK
“Today’s announcement firmly establishes four hikes as ‘base-case’ for 2018 and the conversation now tilts to cadence. Given evidence of tightening supply chains in the U.S., particularly in trucking, where management teams have highlighted difficulties in putting ‘bums in the seat,’ there appears to be incremental inflation pressure that likely haven’t been fully realized. If companies push these costs to consumers, and inflation pressure picks up from here, a 50 bps hike in September becomes a possibility.
“Today’s incrementally hawkish stance suggests the Fed appears unfazed by heightened EM credit volatility in recent months, partially caused by our interest rate policy. At the same time the U.S. is willing to threaten develop world growth with a potential trade war, the U.S. seems willing to undermine EM growth with our monetary policy. Our policies probably aren’t winning us many friends around the global.”
JASON WARE, CHIEF INVESTMENT OFFICER, ALBION FINANCIAL, SALT LAKE CITY
“I think the statement was a bit hawkish relative to market expectations and that’s why we’re not getting a rally. The June hike was already in the market and the market is keying off what they expect for the next six months and it was a bit more hawkish. The dot plots suggest two is on the cards for the second half of this year, I’m skeptical, I think it will lean towards one.
“(Re the yield curve) - I’m a little bit more worried now than a year ago but as far as any immediate threat to the economy, I think it is fairly low. It typically takes, once the yield curve gets down to 50 basis points or less, which is where we are now, it typically takes 12-18 months to invert if it is going to invert, so that suggests we have time (between) now and when it could invert. And then when it does invert it takes typically another 12 months before recession. So, my point is, we are still probably a couple of years off where we really have true anxiety around the flattened yield curve.”
“From my perspective, It is not the absolute change but the rate of change that matter most and the Fed has been proceeding in a very cautious, measured fashion at the short end of the curve and the long end of the curve has been doing the same. Given the fact we haven’t seen rapid changes, slow and steady is winning the race now.
“From the current real estate perspective, some people are pointing to the potential for yield curve inversion. While it is a risk factor, I’m not as worried about that causing the next recession either because of the rise in the percentage of non-bank financial institutions that are not as yield-curve dependent as banks and also because liquidity has never been deeper globally than it is now.
HEIDI LEARNER, CHIEF ECONOMIST, SAVILLS STUDLEY, SAVILLS PLC, NEW YORK
“The real surprise is that the Fed signaled its intention to hike an additional two times this year after today. That’s surprising since GDP growth for the year was only revised up by 0.1 percent to 2.8 percent, and PCE inflation is forecast at 2.1 percent, really in line with the Fed’s 2 percent target.
“They kept the phrase that policy remains accommodative in the statement but if we do get to 2.4 percent by year-end we’ll only be 50 bps below what the Fed sees as the longer-run rate.
Not a large reaction from bonds at this point, just 4 bps or so higher in yield across the curve
ILYA GOFSHTEYN, MACRO STRATEGIST, STANDARD CHARTERED BANK, NEW YORK
“The big surprise came from the dot plots for 2019. The fact that they are now thinking about a faster pace of hikes further out is driving the market reaction currently, therefore it’s not a surprise that the dollar is strengthening across the board and of course emerging markets are participating in that move as well.
“Obviously, anything that suggests that rates are going to be in a faster pace of acceleration is a detriment to EM asset performance. I think that the EM story is a little bit exhausted at this point, so you’re seeing a reaction in EM FX but for the most part it hasn’t been violent so far.
“This is a hawkish surprise that makes the outlook for emerging markets that much more difficult.”
MATTHEW FORESTER, CHIEF INVESTMENT OFFICER, LOCKWOOD ADVISORS INC, KING OF PRUSSIA, PENNSYLVANIA
“In my view, this is very much what markets had expected, but there was some question about the December rate hike and it looks like the Fed is sticking to that plan and I would say this is a very mild negative for risk markets at this juncture. But as the Fed continues along the tightening path, each rate hike becomes more difficult for the risk markets and the real economy to digest.
“We’re expecting what the markets are expecting, that the Fed could institute a press conference at every FOMC meeting, that means that Fed watching will become back in vogue. Now we will need to watch every single meeting. It also means that monetary policy could become more uncertain, because the markets will need to assess their forecast for each and every meeting.”
“Just like we predicted, the Fed would see no issues hiking after such a consistent run of economic indicators recently. Business confidence remains good even in the midst of trade concerns. The outlook for four hikes this year have gone up.”
KATIE NIXON, CHIEF INVESTMENT OFFICER, NORTHERN TRUST WEALTH MANAGEMENT, CHICAGO
“The ‘wow’ moment for me when I heard the statement was that the Fed is anticipating unemployment going even lower to 3.5 percent in 2019 and 2020 and they did not uptick their inflation forecast. So it seems clear the Fed is on board with the premise that we can continue to grow and to improve the employment picture, without necessarily paying the price, quote-unquote, in the form of higher inflation.”
“Markets were generally anticipating that this would be the decision in terms of what was going on with rates, so I don’t see this as being a tremendous surprise. You can see the movement in the market is negligible at best…. Where I do see this impacting the market, though, is I think it creates a little bit more uncertainty. They dropped the excessively accommodative language from the forward guidance, they are clearly on board with the U.S. economy continuing to grow through 2019 and into 2020, so there is no growth slowdown or anything like that in the forecast. So I do think this creates a little bit more uncertainty about whether the Fed will get even more aggressive down the road should they see these conditions firm up further.”
SHAWN CRUZ, MANAGER, TRADER STRATEGY, TD AMERITRADE, CHICAGO
“There’s definitely a little more hawkish tone. If you look back at what really started the sell-off of February, it was the concern about inflation coming out of the jobs report. It looks like the Fed is confirming the build in inflation…I think the changes in projections were actually good for investors. It’s not too high of an inflation number. We did get an increase in GDP growth, and we also got a drop in expected unemployment. If you’re an investor, those are good projections you want to hear. The market likes increased growth expectations.”
ANDRES GARCIA-AMAYA, CEO, ZOE FINANCIAL, NEW YORK
“Overall this is definitely more hawkish but for good reason, inflation data has accelerated. There was a bit of a scare data-wise and you got enough data points recently to show the economic activity is still very strong. You add those two things – economic activity still strong or really strong and inflation showing signs of life - they are trying to basically just get back to neutral.
“The other thing is they didn’t change what they consider to be neutral. But if you want to play this forward, what would change for the yield curve for instance is if they decide neutral is 2.9 percent. That didn’t change, they kept that at 2.9 percent. I always watch that more carefully than the noise of right now. Because the reality is three or four hikes this year is not as important as how those dots look next year and the year after that. So, four hikes versus three hikes this year - what does that actually mean for the consumer? Not much, it matters to the market in the short term but it doesn’t matter to the consumer that much. Where the consumer really cares is what is normal, what is neutral? Is it 2.9 percent, 3.5 percent, 4 percent - because that is going to anchor mortgages, that is going to anchor all the real bogeys the consumer cares about.”
“They dropped the reference to rates will remain neutral for some time. That’s more hawkish.”
“We’ve got the rate hike and we’ve got another two hikes this year being priced in on the dot plan. It doesn’t necessarily mean the Fed will deliver it, but the market is responding to the news.”
“Just dropping the reference that rates will remain below neutral for some time is a little bit more hawkish as well. In terms of initial market reaction, the dollar is stronger, but not an outsized move.”
THOMAS MARTIN, SENIOR PORTFOLIO MANAGER, GLOBALT INVESTMENTS IN ATLANTA, GEORGIA
“Everything about that is exactly in line, which is why the market is not doing anything. It could have stayed at three, it could have gone up to four, but four was definitely in the mix so that is really not a surprise. I guess it is a little on the high side. We had two strong inflation numbers during the meeting. Not too hot but still you’ve gotten some nice increases there so definitely to have raised rates was the right thing to do. It is not surprising the dots have gone to two more rates but they didn’t change the out years. What will be the most interesting will be the commentary (at the press conference) about it.”
BILL NORTHEY, SENIOR VICE PRESIDENT, U.S. BANK WEALTH MANAGEMENT, HELENA, MONTANA
“Notably with their latest economic projections, there are upgrades across the board in growth, inflation and employment. You have short-rates pushing up a bit and equity softening up with the likelihood of a fourth rate hike this year. This is not a total surprise. Rates futures have suggested this as a coin-toss coming in. Overall this is not big change in the Fed’s outlook. “
STEPHEN MASSOCCA, SENIOR VICE PRESIDENT, WEDBUSH SECURITIES, SAN FRANCISCO
“The fact they’re talking about four rate hikes this year instead of three is disappointing. Everybody knew they were going to hike in June. People thought they might pause in September. It doesn’t look like they’re going to do that”
“Higher interest rates is not good news for the stock market. It creates a competitive investment and there’s a chance it slows economic growth.”
“The Fed isn’t the biggest player here ... You have to look at it from a more global perspective,” he said. “If the ECB or the Bank of Japan begin tightening it’ll have a bigger impact than the Fed” (because the Fed has already been raising rates and reducing its balance sheet for some time.)
AARON ANDERSON, SENIOR VICE PRESIDENT OF RESEARCH, FISHER INVESTMENTS, SAN FRANCISCO
“The Fed’s path of gradual rate hikes and slow sheet reduction seems well established at this point. The trajectory of U.S. inflation or the broader U.S. economy would likely need to change materially for the FOMC to deviate from that path. But U.S. economic data has been remarkably steady. Recent developments in Italy, Argentina, Turkey, Brazil and elsewhere aren’t severe enough to force the Fed’s hand. Chairperson Powell has been clear he doesn’t view Fed policy as the source of turmoil, so those hot spots would need to pose a real risk to the global economy for the Fed to react.”
STOCKS: The Dow .DJI weakened to show a loss of 0.2 percent, but was already down slightly before the statement. The S&P 500 .SPX extended a slight loss and was also down 0.2 percent. BONDS: The 10-year U.S. Treasury note US10YT=RR yield rose to 3.0032 percent and the 2-year yield US2YT=RR rose to 2.5984 percent. FOREX: The dollar index .DXY turned slightly positive.
Americas Economics and Markets Desk; +1-646 223-6300