NEW YORK (Reuters) - The Federal Reserve raised interest rates on Wednesday and forecast at least two more hikes for 2018, signalling growing confidence U.S. tax cuts and government spending will boost the economy and inflation and lead to more aggressive future tightening.
Policymakers predicted rates would rise three times next year and two times in 2020, a further indication of confidence in the economy.
STEPHEN MASSOCCA, MANAGING DIRECTOR AT WEDBUSH SECURITIES IN SAN FRANCISCO:
“We’re still below the all time high. The 30 year is also below its high. I don’t think there’s any new news here. It was a quarter of a point increase. We’re taking about 3 increases this year. I don’t know how anybody could be surprised.”
“If some economic numbers were really hot you might see four rate hikes this year. If employment was hot or inflation. I don’t think that’s going to happen. I think Powell is a don’t upset the apple cart guy.”
“My view is they’ll go to 2-2.25 percent and see what the reaction is. If we had 2-3 inflation reports of 3-4 percent the Fed would start acting more aggressively.”
JASON WARE, CHIEF INVESTMENT OFFICER AT ALBION FINANCIAL IN UTAH:
“The market was concerned that we’d get more of a hawkish near term statement but the balance is, that looking ahead, there might be a steeper path into 2019 and 2020 for rate hikes. The market is trying to balance the near term with the longer term, but in the stockmarket, the near term matters more than the longer term. Then, we’ll take 2019 and 2020 as they come.”
ALEC YOUNG, MANAGING DIRECTOR OF GLOBAL MARKETS RESEARCH, FTSE RUSSELL, NEW YORK:
“Investors’ focus was very much on the Fed’s updated monetary policy outlook and the pace of future rate hikes. Markets came into today’s decision with many investors worried about the possibility of a Fed policy mistake if they tighten too much in the face of recent fiscal stimulus from tax reform, an uptick in inflation and ongoing synchronized global growth. The Fed’s updated economic outlook was less hawkish than feared, sparking a relief rally in stocks as markets discounted continued economic growth and gradual interest rate hikes. Overall, investors welcomed the fact that while the Fed remains confident in the economic expansion, it signalled a willingness to continue to be gradual in raising interest rates. Goldilocks is alive and well.”
MINH TRANG, SENIOR FOREIGN CURRENCY TRADER, SILICON VALLEY BANK, SANTA CLARA, CALIFORNIA:
“It looks like a bit of a letdown even though the Fed’s overall outlook is hawkish because their economic outlook has strengthened. That’s why we are seeing a bit of a disappointment on the dollar side. I still think the tone is long-term hawkish, which is bullish for the dollar. Going into 2018, there is a lot of bearishness on the dollar.”
CANDICE BANGSUND, PORTFOLIO MANAGER, GLOBAL ASSET ALLOCATION, FIERA CAPITAL
“There’s a new line in the statement essentially acknowledging that the economic outlook has strengthened in recent months, that’s obviously a more hawkish development, while at the same time also acknowledging that some of the data in Q1 has softened somewhat after a strong Q4.
“Our expectation going into the new Fed chairmanship has been a status quo, what we saw in the Yellen era. While his semi-annual testimony to Congress was a bit more on the blunt side, (Powell) acknowledged his personal outlook had strengthened. He wasn’t afraid to make his expectations or opinions heard. At the same time, right off the bat, what we’re seeing in the statement, a little bit for the hawks, a little bit more for the doves, it’s giving us that more status quo, gradual approach to normalization that we’ve been adjusting to and that’s why you’re seeing the markets respond as they have. But no major surprises.”
MARK GRANT, CHIEF GLOBAL STRATEGIST AT B. RILEY FBR INC,FORT LAUDERDALE, FLORIDA:
“The FOMC policy statement was pretty much in-line with general expectations. Nothing moved dramatically with the exception of the equity markets that breathed a sigh of relief that more rate hikes were less likely past the three already baked into the markets. The statement was fairly optimistic about U.S. growth and seemed to ignore the Atlanta’s Fed’s GDP Now number of just 1.8 percent growth. The median FOMC member now expects a GDP of up 2.7 percent which is up 0.2 percent from their December forecast. I think that equities are reacting to the growth projections. Treasuries are off, but slightly. Overall, no real surprises and a continuing of the policies set under Ms. Yellen.”
THOMAS MARTIN, SENIOR PORTFOLIO MANAGER AT GLOBALT INVESTMENTS IN ATLANTA, GEORGIA:
“Everybody expected the rate increase but there was some question if it would go to three rates to four. It stayed flat at three raises for now. The reason was the Fed statement that economic activity has been moderating since the last time they talked about it. There is a moderation so they are not going to raise it to four at this time.
“All in all, the message for the markets and why the S&P went up is that you see the message is economic growth is still OK now and perhaps sustainable more so than people might have thought for 2019 and 2020. But in the longer run you are going to have this moderation at a reasonable level. So really nice for equities.”
RUSSELL PRICE, SENIOR ECONOMIST AT AMERIPRISE, MINNEAPOLIS:
“I still think three is the most likely expectation this year. They did tweak their projections a little bit for both dovish and hawkish. The unemployment rate expectations were tweaked lower slightly, by a tenth of a percentage point.
“But expectations for the federal funds rate over the longer term were equally tweaked higher by a tenth of a percentage point.
“In other words, they indicated that unemployment can go a little bit lower without creating additional inflation pressures. Which is good from both the ability of the economy to continue to grow at a good pace without creating a lot of inflation and it shows they’re probably still in wait-and-see mode as to whether we overheat this year because of the added stimulus.”
“They are probably leaving themselves some room to operate given that, although the economy is likely to do well this year given the added stimulus, there is also the risk we could see a soft patch if the tariff situation continues to escalate. Like everyone else they want to see how that plays out.”
MATT MISKIN, MARKET STRATEGIST AT JOHN HANCOCK INVESTMENTS:
“The guidance in terms of the future rate hikes is a touch more hawkish than originally expected. 2019 looks like we’re going to get a faster pace of rate hike. This year, it looks like a similar projection.”
“This a new Fed Chairman starting with a bit of a hawkish tone as he takes leadership.”
“In terms of stocks, we have to see how it settles because initial reaction does not fully reflect well. I won’t be surprised to see financials and banks take a little bit more of leadership role. Stocks can get through a faster rate cycle as long as the growth is there to support it, and from what the Fed is forecasting, the GDP will be enough to support equities in a tighter cycle.”
AARON KOHLI, INTEREST RATE STRATEGIST, BMO CAPITAL MARKETS, NEW YORK:
“I think the Fed did a pretty good job in pulling off a hike that was fairly well choreographed and well telegraphed to everyone. Compared to my expectations it’s a very dovish scenario.
“It’s going to be really interesting to see what (Powell) says in the context of the reaction to markets. What’s important in this meeting and what’s different from the past, it’s not that the market’s reaction to the Fed is worth watching, it’s that the Fed’s reaction to markets is worth watching. Primarily its Powell’s reaction to what the market does. Does he try to direct the market the way that Bernanke did or does he play a hands off approach and let the statement speak for itself the way Yellen did? Given the muted reaction maybe there’s not much of a chance of him needing to step in, but getting that response function to the market, gauging whether the market got it right or wrong, is super important.”
RANDY FREDERICK, VICE PRESIDENT OF TRADING AND DERIVATIVES, CHARLES SCHWAB, AUSTIN, TEXAS
“There was nothing real shocking here. I think the market shooting up and back down is typical. We often see the market make a quick knee jerk reaction and it’s often in the wrong direction.
“The more important thing will be when he (Fed Chairman Jerome Powell) is talking not on script in the press conference, but no surprise here. There was a 100 percent chance I think for almost eight weeks straight now that we would get this quarter point hike.
“If he says anything that for whatever reason the markets perceive to be hawkish, that there is going to be maybe a higher level of likelihood of four hikes, then the market is likely to sell off a little bit based on that. But I don’t think it will be huge.”
PRAVEEN KORAPATY, GLOBAL HEAD OF INTEREST RATE STRATEGY, CREDIT SUISSE IN NEW YORK:
“It was a little more dovish than our economists were expecting. But I would say overall if I looked at it separate from expectations, I would say on course – not too hawkish, not too dovish.
“We continue to think they’re on the path for four hikes this year even though the median dots didn’t move. I think we were one dot away from the median for 2018 moving up to four hikes. So I think four hikes should be people’s’ base case.”
JUAN PEREZ, SENIOR FX TRADER AND STRATEGIST, TEMPUS CONSULTING, WASHINGTON:
“The most important thing is the Fed sticking to its original plan of three rate hikes. Anymore would be too much. Any faster increases in borrowing costs could affect the economy. I think we are pretty good where we are in terms of the current pace of rate hikes. There was some thinking we could see up to four (hikes). The other thing is that the economic outlook has strengthened and that’s a good thing. It’s very consistent with what Powell told Congress. They do think the economy is strong enough for further increases in borrowing costs.”
KATHY JONES, CHIEF FIXED INCOME STRATEGIST, SCHWAB CENTER FOR FINANCIAL RESEARCH
“I though it leaned a little bit towards the hawkish side. One more dot shift and we would have gotten the expectation for four rate hikes this year, so they were pretty close to moving in that direction.”
“They upgraded their assessment of the economy, which I think is significant. I think that’s an indication that they’re taking into consideration tax cuts and spending increases.”
“All that suggests to me that they’re leaning a little bit hawkish. I’m surprised that the market has not responded to that, but I suppose that suggests there was a feeling this was already discounted by the market.”
JEFF CARBONE, MANAGING PARTNER, CORNERSTONE WEALTH, HUNTERSVILLE, NORTH CAROLINA:
“The rate hike is no surprise. It was really reassurance about the amount of rate hikes we will get for 2018. There was no change there. That’s the big thing we were looking for…Inflation is still not a concern for them. There are positives with unemployment continuing to decrease. There was reassurance that the economy is strong. We may be in the later part of the business cycle, but it’s the early late stage of the business cycle. It still means there’s definitely more room for the market to run.”
FRITZ FOLTS, CHIEF INVESTMENT STRATEGIST, 3EDGE ASSET MANAGEMENT LP IN BOSTON:
“Right now the equity markets are holding their break and however they read the tea leaves coming out of this press conference is, at least in the short term, going to be very influential. I don’t see how you could say the Fed isn’t (a risk). The Fed could certainly be a risk, and I don’t think you can discount that. The problem is you have someone who’s an unknown. We haven’t had three press conferences with him and we don’t know how to interpret what he says.”
“We were comfortable not being as aggressive on equities going into this meeting because it could push markets one direction or the other.”
“There weren’t really any surprises out of the press release, which is a good thing, and that’s why the market has reacted positively. The Fed is still expecting three rate hikes this year. They did hike 2019 by one and 2020 by two more. I think that was expected by the market.
“Going into the press conference, they’ve raised economic growth expectations and lowered unemployment, but inflation was little changed. So we’ll need a bit more explanation on that because you’d expect to see inflation moving up a bit higher in that type of environment.”
JIM PAULSEN, CHIEF INVESTMENT STRATEGIST, THE LEUTHOLD GROUP, MINNEAPOLIS
“That’s a Fed that really feels good about the economy, not only this year but into next year. That came through in rate hikes they put into play in 2019 and 2020. And they were only one vote away from a fourth rate hike in 2018. That tells you four hikes is very much on the table for 2018.”
“The initial response by equities was to go up because of the confidence the Fed seems to have in the economy. But with bond yields going up in anticipation of more hikes in coming, that kind of scared the stock market again.”
“That’s the struggle the market is in. Good growth in the economy also probably means higher inflation and higher yields. The market today is a microcosm of this year. It’s going nowhere fast. It goes up on good economic news it goes down on higher rate news.”
RICK MECKLER, PRESIDENT, LIBERTYVIEW CAPITAL MANAGEMENT IN JERSEY CITY, NEW JERSEY
“Certainly there was no surprise in terms of the actual hike. The positive for the market is that the focus on future rate hikes seems more due to a Fed view of a better economy than necessarily inflation prevention. If the economy can grow with moderate inflation, that is certainly the ideal situation for stocks.”
“That said, we are going to be continuing to see rate increases this year and it looks like next as well and that does provide more competition for equities. So I think it will be a struggle for the market to go up at the rate it has been as investors try and balance the strength of the economy with the opportunity to invest in fixed income at higher rates.”
STOCKS: U.S. stocks extended gains, and were last up 0.7 percent. BONDS: U.S. bond yields dipped, then rose. FOREX: The dollar index .DXY hit a session low.
Americas Economics and Markets Desk; +1-646 223-6300