The Federal Reserve kept interest rates unchanged on Wednesday and said it was “closely monitoring” global economic and financial developments, but maintained an otherwise upbeat view of the U.S. economy.
The central bank’s decision was widely expected after a month-long plunge in U.S. and world equities raised concerns that an abrupt global slowdown could act as a drag on U.S. economic growth.
* “The committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation,” the Fed’s policy-setting committee said in a statement that diminished the chances of a rate hike at its next meeting in March.
* Fed policymakers did not give updated forecasts on the path of monetary policy on Wednesday but said they expected the labor market would continue to strengthen and the economy would expand even with “gradual adjustments in the stance of monetary policy.”
IAN GORDON, G10 FX STRATEGIST, BANK OF AMERICA MERRILL LYNCH, NEW YORK, NEW YORK:
“The statement definitely gave some nod to the slowdown in U.S. growth, to some of the risks emanating from overseas, but it doesn’t seem like they’ve drastically reassessed their outlook for the U.S. economy. So from that standpoint, overall I’d say this is dollar neutral.
“I think they have brought themselves some time before the March meeting to assess the global landscape, assess the momentum of US growth before making a more significant change in tone. But the overall tone of today’s statement was a little more dovish. I think it still was a means of buying them time to asses what’s happening globally and what’s happening in the U.S.”
SHARON STARK, FIXED INCOME STRATEGIST FOR D.A. DAVIDSON & CO., ST. PETERSBURG, FLORIDA:
“The statement is along the lines of what I expected only because I think the Fed is not ready to say ‘We need to back off here.’ They need to see more data before they are clear on what their next moves will be. The market is disappointed because they expected the Fed to come out and admit they made a mistake moving rates, but I don’t think they need to do that yet. The next set of data, both in growth and inflation is important. The Fed is not inclined to make any changes. With that said, financial markets have a fair amount of instability and they will continue to monitor that.
“I would say it’s more likely they’ll raise once or twice this year. I have two raises in my forecast. You may see one in June and one at the end of the year. They’ll be careful in monitoring how the economy reacts.
“Right now the Treasury curve has steepened a little bit, but as we get further out the curve will flatten with the spread between 2s and tens between 115 and 120 basis points. We were at 116 this morning and we’re closer to 120 now.”
MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISOR, ALLIANZ, NEWPORT BEACH, CALIF:
“The Fed statement signals that, in the frustrating absence of a U.S. economic liftoff, it remains vulnerable to external economic developments and volatile financial markets.”
PHIL ORLANDO, CHIEF EQUITY MARKET STRATEGIST, AT FEDERATED INVESTORS, IN NEW YORK:
“It was fine. We got exactly what we were supposed to get. But you’ve got a buy-the-rumor, sell-the-news deal here. The stock market has been up 5 percent since Wednesday afternoon, in part anticipating this is the statement we get, or something similar to this. So what we were hoping for was to see the Fed sort of back off this pre-ordained ‘we are going to hike four times over the course of the year’ type of thing. They put enough wiggle language in there to indicate they are monitoring international developments, they are watching inflation and the labor market. So they put in the language they needed to reiterate that they are data sensitive in terms of their decision and they are not on some pre-ordained glide path.
“That said, the market rallied 5 percent since Wednesday afternoon to anticipate something like this. So what typically happens is you buy the rumor and when the event actually happens that is the point you take profits.”
BRIAN JACOBSEN, CHIEF PORTFOLIO STRATEGIST, WELLS FARGO FUNDS MANAGEMENT, MENOMONEE FALLS, WISCONSIN:
“The flock of members of the FOMC may be more hawkish, but this was a dovish statement. I think the soonest they’ll hike again is April or June. Language about the global environment will need to be removed before they hike.”
ART HOGAN, CHIEF MARKET STRATEGIST, WUNDERLICH SECURITIES, NEW YORK:
“Market reaction is going to be a jumble and it always is, there’s a certain amount of things priced in in terms of expectations for dovishness. I’d certainly say that the statement leans in the dovish side of neutral, they walked back a few things that they had in the December statement.
“It is the walk-back that everybody was looking for. The net effect of this should be positive for the (stock) market, and for the most part it will manifest itself in the dollar.
“If a headwind to this (equities) market had been a narrative that the Fed was raising four times this year I think that has been eliminated now.”
JACK FLAHERTY, CO-PORTFOLIO MANAGER OF THE GAM UNCONSTRAINED BOND STRATEGY IN NEW YORK CITY:
“It’s not a big surprise. It’s a hair dovish just because of the wording they used in acknowledging the weakness in global markets. There’s a little bit different language they’ve used before, but they are acknowledging that global effects can weigh on economic activity. Like everyone else they are monitoring the global developments closely. Not a huge surprise from what people are looking for – it’s the huge elephant in the room. Most people expected them to acknowledge the global developments.
“As for markets, I don’t see things moving a heck of a lot. Bonds have moved a hair, stocks moved down a bit in terms of concern of economic activity. The equity market is a little bit susceptible to everyone feeling concern about economic development.
“We were thinking more they would have two moves this year. One or two is all you can call right now. The Fed is doing a pretty good job on this right now. They are communicating well. From the speeches that led up to the statement from Fed governors. You don’t want to surprise markets.”
JOE MANIMBO, SENIOR MARKET ANALYST, WESTERN UNION BUSINESS SOLUTIONS IN WASHINGTON:
“Global risks are back on the radar for the Fed. In terms of market expectations, the tone the Fed struck really met them. There was a slightly dovish slant to the Fed’s latest statement. I wouldn’t say the Fed is overly concerned at this point. I would say the Fed has maintained its composure in the face of global pressures.
“We’ll have to see how global developments going forward, but (the statement) adds credence to market views that fewer instead of more rate hikes appear on the table for the Fed this year.”
KATHY JONES, FIXED INCOME STRATEGIST, CHARLES SCHWAB, NEW YORK:
“I thought it was on the dovish side. One of the things that stood out to me is that they expressed concerns about inflation tracking below their target for a significant period of time, which indicated to me that they are perhaps concerned that what they’re targeting isn’t reachable very easily and they may have to do more. A dovish statement was anticipated, but it leaned a little bit more on the dovish side than I would have expected.”
NINH CHUNG, HEAD OF PORTFOLIO MANAGEMENT AT SVB ASSET MANAGEMENT IN SAN FRANCISCO:
“With regard to the impact on inflation from global financial conditions, they put the tone of their September meeting back into this statement. Four hikes may still happen if global conditions reverse themselves, but at this current trend it doesn’t look like the Fed will be able to move at all this year.
“I don’t know how much longer they can be confident in reaching their inflation goals, given the fact that they are going back and forth in terms of global developments and global economic activities putting downward pressure on inflation.”
WESLEY SPARKS, HEAD OF U.S. CREDIT STRATEGIES, SCHRODERS INVESTMENT MANAGEMENT, NEW YORK, NEW YORK:
“It was as expected, but also nice, and what I would have hoped for is the acknowledgement of international market concerns. Frankly, at the moment I don’t think the Fed is the key driver of the market.”
ADAM SARHAN, CEO, SARHAN CAPITAL, BAY HILL, FLORIDA:
“Markets across the globe do not think it was prudent for the Fed to raise rates last month. Since the Fed raised rates in December, a slew of markets across the globe have plunged and that clearly tells you everything you need to know.
“Additionally, the global economy is dramatically slowing and headed for a recession. The fact that the Fed is now starting to raise rates. Clearly shows you they are disconnected from what is actually happening on the ground. Put simply, Main Street simply is not ready for a rate hike.”
STOCKS: U.S. stock indexes bounced, then gave back some gainsBONDS: U.S. bond prices pared lossesFOREX: The dollar weakened modestly against the yen and strengthened a bit against the euro