The Federal Reserve hiked interest rates for the first time in nearly a decade on Wednesday, signalling faith that the U.S. economy had largely overcome the wounds of the 2007-2009 financial crisis.
The U.S. central bank’s policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.
TEXT OF STATEMENT:
DAN HECKMAN, NATIONAL INVESTMENT CONSULTANT AT US BANK, KANSAS CITY, MISSOURI:
“I think that initially the Fed is going to take a more hawkish viewpoint in the first half of next year and then become more dovish simply because the calendar works against them with the election. They’ll require much stronger data to make any Fed fund rate increases in the second half of 2016.
“There is quite a bit about that in the statement – that they are not to the 2 percent target that they’d like. So I want to hear more about that. I think she (Yellen) recognizes that the labour markets are getting tight and that if you get wage inflation, that should really start pushing up on the band of inflation. Things could progress inflationary wise more rapidly than the market expects if we get a price turnaround in these energy markets, for example.”
JULIEN SCHOLNICK, PORTFOLIO MANAGER, WESTERN ASSET MANAGEMENT CO., PASADENA, CALIFORNIA:
“They seem pretty confident with the underlying economic development, especially the labour market. The fact they are expected to go four times in 2016 (shows) they believe they will achieve their 2 percent inflation target. With the expansion of the reverse repo programme, they should be able to achieve the rates they want. It gives them more flexibility.
“The market was believing the Fed would aggressively lower its fed funds rate projection at the end of 2016. Since that didn’t happen, that could be construed as somewhat hawkish expectations. That’s why we are seeing the flattening of the yield curve with the long bond turning positive. The Fed did give a pretty upbeat on its economic assessment. We don’t think there’s anything that will derail them from moving again in March.”
ADAM SARHAN, CHIEF EXECUTIVE OF SARHAN CAPITAL:
“The most important thing is that nothing has changed: the Fed and markets are still data dependent. We’ve the press conference and that could change everything. The Fed made it clear with their dovish statement that there’s no urgency to continue raising. They just wanted to get the ball moving in that direction, they’ve done that and now more data needs to come out to dictate what their next step is going to be.
PHIL DAVIS, CHIEF EXECUTIVE OF TRADING ADVISORY WEBSITE PHILSTOCKWORLD.COM:
“It’s just what we thought it would be. (The market reaction) seems to be a bit of a head-fake. There’s a bit of relief that it wasn’t worse than it is, but overall, it also doesn’t do anything to the market. So I think that after a little bit of a pop here, we’re going to start selling off either later today or tomorrow. We’re going to go back to a selling market. This was the big catalyst that was moving the market up, and now what’s left? Why would they go up now?
GARY KALTBAUM, PRESIDENT OF KALTBAUM & ASSOCIATES IN ORLANDO, FLORIDA:
“I have this motto: everything’s fine as long as the market’s cooperating. I think you need to sit back and relax and let the field clear over the next couple of days to see which way the market wants to go off of this. It does nothing to change the economy, hurt the economy, help the economy. It’s still the easiest monetary policy in history and that’s not going to change.”
MATTHEW TUTTLE, CHIEF EXECUTIVE OF TUTTLE TACTICAL MANAGEMENT IN STAMFORD, CONNECTICUT:
“I think they hit a home run as far as stability in the markets go and not upsetting the apple cart and pretty much giving people what they expected. Going forward, now the debate is going to be how far, how fast, whether it was the right thing to do or not, what’s going to happen with the balance sheet, so there’s still a lot to play through, but at least this is out of the way. Now it’s done, now let’s move on and worry about other things.”
KATHY JONES, FIXED INCOME STRATEGIST AT CHARLES SCHWAB IN NEW YORK:
“The dollar is up a little bit, yields are up a little but not substantially, so the market got what it expected so far. =
“I think what we are really seeing is what we would have expected. Seeing a firmer dollar. I’m surprised the curve has steepened instead of flattened, that might be because some dots imply a slower pace. Not slower than most expected, but slower than some people thought. It’s a very small steepener, but in the next few days we’ll probably be back to flattening. I would like very much to get the Fed’s view on inflation and what their plan is. I’m wondering what it is that they are looking at in terms of inflation. Are they seeing it come up?”
RANDY FREDERICK, MANAGING DIRECTOR OF TRADING AND DERIVATIVES FOR CHARLES SCHWAB IN AUSTIN, TEXAS:
“The market’s reaction is pretty much what I expected. It was a little bit of a negative reaction initially, but that is typical. The very first reaction is often in the wrong direction. It kind of overshot to the downside, from the equities market perspective. Then it turned around and now is pretty much back to where it was. I think that tells us that the market expected it and it was pretty much already built in.
“The CBOE Volatility Index .VIX started the day lower and started to drop a little bit just before the statement. Not a huge reaction there. The fact that almost all the reactions were somewhat muted tells us how built into the market this already was.”
MARK LUSCHINI, CHIEF INVESTMENT STRATEGIST, JANNEY MONTGOMERY SCOTT, PHILADELPHIA:
“The statement had I think a dovish tilt to it, given the fact that it mentioned the word gradual on several occasions. I think it was an effort to make sure they telegraphed to investors this was not going to be an aggressive rate hike cycle, given the current data and expected data. So that’s viewed on balance as good by the market, but between now and 4 (p.m.), we’ll see.”
CRAIG MAUERMANN, MUNICIPAL BOND FUND MANAGER, BMO ASSET MANAGEMENT, MILWAUKEE, WISCONSIN:
“Typically what happens after a Fed move is the long end will rally and front end will sell-off. As this is the most gradual, therefore we think the impact is going to be extremely gradual and that municipal bonds continue to be a very good place to be.
“We still have income and it is going to be rising. Tax rates are not going down. They are higher than any time in recent history. Municipalities themselves have been strengthening for many years because of stronger finances. They have benefited from the U.S. economy recovering. They have been right-sizing their reserves and borrowing less than before. They are all benefiting from lower gas prices in that they are spending less on their fleets of vehicles.
“The most immediate impact with respect to the municipal bond market is what is going to happen to savers. It may not affect what savers see right now but certainly a second move would certainly turn around the trend of just being down.”
JOE KINAHAN, CHIEF STRATEGIST, TD AMERITRADE, CHICAGO:
“Stocks are going back to where they were this morning. Those two hours before the Fed rate hike it’s not a big surprise (stocks) were headed back down towards the zero mark as people don’t want to necessarily take risks heading into the Fed announcement, even though there was a high probability the Fed would raise rates. Now we’re back to business as usual.”
“You have quadruple expiration on Friday between futures and options. So I think the trading you’re going to see now is going to be driven off of that as people start to unwind off of whatever is left from those positions.”
TAI WONG, DIRECTOR OF BASE AND PRECIOUS METALS TRADING FOR BMO CAPITAL MARKETS IN NEW YORK:
“Gold is trying to find its way, trading $1,063-$1,073 after the unanimous rate hike and a dovish statement and discernibly lower dot plot. The muted reaction suggests that the weakest shorts covered earlier today when gold traded above $1,078.”
JEFF BUETOW, CHIEF INVESTMENT OFFICER AT INNEALTA CAPITAL IN AUSTIN:
“We’re not surprised at all. It was so well choreographed at this point that I think if they didn’t do it the market would have reacted quite negatively, They’re just giving themselves a lot of leeway here to keep it at this level for a while. I think this is a credibility-check opportunity for them.
“The market is reacting quite favorably on the equity side. I am kind of surprised, I would have thought that it would have been a fairly non-event. That’s kind of odd, unless it’s just relief knowing that they are going to retain their accommodative stance for a long time. That say that in the text, and so perhaps people are digesting that to realise that this is going to be really extraordinarily low rates for the foreseeable future.”
JIM COLBY, CHIEF MUNICIPAL STRATEGIST AT VAN ECK GLOBAL, NEW YORK:
“For municipal investors, the most critical aspect of all this is clarity. Nobody in any of the financial markets like uncertainty. Investors are going to be happy with the decision, which was a long time coming. Now, we are on a new trajectory and potentially a totally new economic environment. That clarity is going to make it a lot easier for investors in municipal marketplace to make decisions.
“The other aspect that municipal investors should consider, look what happened to the yield curve when the Fed raised rates between 2003 and 2006. The yield curve flattened significantly. That suggests that the opportunity to earn better real rates of return is going to reside much further out on the yield curve. Clarity and understanding how the municipal market has reacted in the past are the two salient points to make.
PAUL CHRISTOPHER, HEAD GLOBAL MARKET STRATEGIST AT WELLS FARGO INVESTMENT INSTITUTE IN ST. LOUIS, MO.:
“It’s a couple of more rate hikes than we were thinking they were going to give us. We were looking for one in the spring and late autumn after the elections. Instead this appropriate rate of 1.375 implies four rate hikes.
“The Fed was hoped to be gradual. They appear to be coming in with an approach that is gradual so the markets like that. Could they have done it differently and be even more market friendly, yes.
“It’s not clear to me glancing through this information how they’re going to communicate and how they’ll give these hikes. One might presume quarterly. To the extent there’s some uncertainty about the pace you could see some volatility in the months to come.
“The Fed was describing the economy as pretty solid. If the Fed thinks the economy can handle four rate hikes that could also be a source of additional confidence for equity markets.
“We were hoping for a quarter point today maintaining the range and an additional 2 next year, not four. We were hoping they’d revert to the patient language.
“It’s still much more gradual than what they gave us in 2004 to 2006. We think that’s a good thing.”
JIM RITTERBUSCH, FOUNDER OF ENERGY CONSULTANT RITTERBUSCH AND ASSOCIATES, CHICAGO, ILLINOIS:
“Because the Fed did what everyone expected them to do, there was not much impact to crude futures. The only way it would have impacted the futures was if the Fed did something unexpected.”
SANDY RUFENACHT, PORTFOLIO MANAGER, THREE PEAKS HIGH INCOME FUND:
“This was entirely anticipated. We’ve been as short as we’ve ever been in terms of duration because of it. With employment as strong as it’s been, they had a green light to do this a while ago and now they choose to do it when the global economy is sputtering. To me that’s a very confusing Fed to read. They didn’t raise rates in September when everyone thought they were going to do so and I don’t think the data is any stronger today than it was back then. Going forward I don’t think you as an investor need to be worried about runaway interest rates. The economy is too tepid to get too aggressive.”
NICHOLOS VENDITTI, PORTFOLIO MANAGER, THORNBURG INVESTMENT MANAGEMENT, SANTA FE, NEW MEXICO:
“We’re going to end up at basically at 1.40 at end of 2016. Short term, that could cause a little bit of volatility in all fixed income funds, but medium to long term this is going to play out much to their benefit. There may be a little bit of fear initially but the sun will come out tomorrow and we think it’s going to shine pretty bright… You’ve seen fixed income trading in general on Wall Street be very compressed the last several years, which has culminated in a few notable firms making mass layoffs. And for investors you have the issue that there’s a whole swath of the investing population that relies on income… It’s been very hard to get that without taking maybe excessive risk… This is the first step in potentially normalizing that environment and unwinding some of the risk bubbles that have been created as a result of this continued interest rate policy.”
MICHAEL MARRALE, HEAD OF RESEARCH, SALES AND TRADING AT ITG IN NEW YORK:
“I’m pretty optimistic about what they are talking about for 2016, it’s exactly what investors want to hear about the Fed’s confidence in the economy. They are telling you what they are going to do in the next year, which is to investors delight. Stocks are really the only place to go, I don’t see any real destruction or dislocation because of this, it adds certainty to the picture and that’s what investors crave more than anything.”
ROBERT PHIPPS, DIRECTOR, PER STIRLING CAPITAL MANAGEMENT, AUSTIN, TEXAS:
“Bank stocks are leading the market right now. Energy stocks are underperforming and that’s the one glaring weakness that I see. They’re up but up very modestly.”
MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISOR, ALLIANZ, NEWPORT BEACH, CALIF:
“Wrapped in dovish language, the Federal Reserve has just embarked on what will be the loosest tightening in its history. The Fed is going out of its way to assure markets that, by embarking on a “gradual” path, this will not be your traditional interest rate cycle. Instead it will be one remembered as an unusually loose tightening.”
STOCKS: U.S. stock indexes ralliedBONDS: U.S. bond prices sold off in the short end, while long prices ralliedFOREX: The dollar gained against the euro and yen before selling off and was lately lower