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 signalled it would tolerate above-target inflation at least through 2020.
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 2.9884 percent and the 2-year yield US2YT=RR rose to 2.5901 percent. FOREX: The dollar index .DXY turned slightly positive.
Americas Economics and Markets Desk; +1-646 223-6300