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FOMC stands pat on rates and bond buying, vaccines help outlook

NEW YORK (Reuters) - The Federal Reserve held interest rates and its monthly bond-buying program steady on Wednesday, nodding to the U.S. economy’s growing strength but giving no sign it was ready to reduce its support for the recovery.

FILE PHOTO: The Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 27, 2019. REUTERS/Brendan McDermid

In its statement released after a two-day policy meeting the central bank did note progress on vaccines and economic recovery, a slightly less negative view than the Fed’s description in March, when it said the health crisis “poses considerable risks to the economic outlook.”

Markets were initially steady after the FOMC statement, but stocks added to gains and U.S. Treasury yields fell after Fed Chair Jerome Powell said in a question and answer session that it was not time to start talking about tapering its bond buying program.

MARKET REACTION:

STOCKS: The S&P 500 was 0.25% higher

BONDS: The 10-year U.S. Treasury note yield ticked higher then eased to 1.6253% and the 2-year yield slipped to 0.1680%

FOREX: The dollar index was off 0.29%

COMMENTS:

MICHAEL ARONE, CHIEF INVESTMENT STRATEGIST, STATE STREET GLOBAL ADVISORS, BOSTON

“You can see in the statement they have now credibly acknowledged that the economy is doing better than they thought and inflation is rising.

“It sets up this dynamic as the year plays out. If this continues, does the Fed feel compelled to act? Obviously today they didn’t. But if this disconnect between what they expect from the economy or labor market and inflation continues to happen, will they be forced to do something? That is the crux of the question.

“The Fed is concerned that long-term rates, which they have less control over, begin to tick up and begin to cause unexpected tightening of financial conditions. So, the Fed is pleased as punch that markets aren’t anticipating anything till the end of ’22 or until early 2023. So that buys the Fed some time.”

TIFFANY WILDING, NORTH AMERICAN ECONOMIST, PIMCO, NEWPORT BEACH, CALIFORNIA

“You have to be really certain that the pandemic is behind us. In that regard it is notable that they talk about the vaccine progress in the statement. I think you probably need to see more evidence the vaccines are working, that they’re bringing down case counts, fatalities are dropping. So that gives you assurances that these variants aren’t going to be a problem. Then that can get you back to the economic data, to start to focus on it, and start to feel really certain we’re on a trajectory to reach substantial progress. Then you can start to signal – ok we’re going to be ok. I don’t think you have that today.”

“If you look at the 2013 experience, they started talking about tapering about six months before they announced it… If we reach these goals on the pandemic by June, they probably start to feel comfortable enough to start talking about it then and then taper in December.”

PATRICK LEARY, CHIEF MARKET STRATEGIST AND SENIOR TRADER, INCAPITAL, MINNEAPOLIS

“It’s largely as expected, my biggest observation is that it’s a big nothing burger so to speak, but that’s not to say that it wasn’t expected to be that.”

“There was a change where they flagged that they’re no longer saying that the health crisis is weighing on inflation. It’s super minor, but I think that what that shows is that inflation has room to pick up and the committee is recognizing that inflation has room to go. They continue to use the word transitory, so much that’s becoming almost a humorous buzzword among strategists and traders in the marketplace, because it’s just hard to know what transitory is. Right now the market believes them, its hard to say whether they’ll be right or wrong, but one thing I keep believing is that whether they are right or wrong about inflation I think the market is going to get impatient about the level of inflation and how long it might last, and it might be perceived by the market that that inflation is not transitory, causing a little bit of a revolt, so to speak, in the bond market. We’ll see how that plays out. I’m not sure the market will be comfortable with the Fed just saying it’s not a problem.”

GARY POLLACK, HEAD OF FIXED-INCOME, DEUTSCHE BANK PRIVATE WEALTH MANAGEMENT, NEW YORK

“The Fed is singing from the same song sheet that it’s been singing for a while now. I think the market’s a little disappointed that the Fed is not a little bit more proactive.”

“The economy’s sort of at this point where things can start booming rather quickly. And (the Fed) recognizes the inflation risk, but at the same time shrugs them off to sort of transitory factors.”

“I think the market is a little disappointed here with the Fed that it’s not responding and reacting as quickly as they would like it to to the economic forecast that itself is projecting.”

KEVIN FLANAGAN, HEAD, FIXED INCOME STRATEGY, WISDOMTREE FUNDS, NEW YORK

“The Fed underscored a lot of uncertainty remains. In this kind of a backdrop, with inflation being transitory, they’ll continue to be pedal to the metal in terms of monetary policy.

“Without a doubt the Fed remains ultra-dovish, and this statement underscores that point. We think their very aggressive ultra-dovish policy is the way to go for the foreseeable future.

“We do feel that a higher inflation reading this year and in 2022 will prove to be not transitory, that the Fed will hit that 2% threshold and above, if not even higher, on a more sustained basis. So that’s where I think we would be on the side of disagreeing with Chairman Powell, that we think inflation is going to gain a toehold.”

DAVID CARTER, CHIEF INVESTMENT OFFICER, LENOX WEALTH ADVISORS, NEW YORK

“The Fed statement was somewhat more optimistic than usual. However, there were no big surprises. The party can continue in markets, but it’s time to start looking for your jacket if Biden’s new fiscal plans are overly aggressive, which could lead to a rebound in inflation.

“The Fed’s optimism has some concerned that tapering or higher rates may occur sooner than expected.

“The future focus will likely be on the taper timetable. Powell has historically done a nice job saying the right things to keep markets calm but discussion about tapering could create some volatility.

“Some investors trade on the headline, while longer-term investors will be more interested in the details and the press conference.

“Market reaction is a bit muted as investors are looking to get more detail from the press conference and see how markets interpret it.”

STEVEN VIOLIN, PORTFOLIO MANAGER, F.L.PUTNAM INVESTMENT MANAGEMENT COMPANY, WELLESLEY, MASSACHUSETTS

“In a lot of ways this delivered exactly what the market was expecting and eventually that is going to run out, but for the time being they are hewing very much to the script. They set out the expectation they are not going to change the policy course until they see a ‘string’ of higher inflation numbers which we’ve seen some evidence of, but how long that string is, is undefined. So at least they are going to give this some time until the base effects run out in terms of the comparisons versus a year ago.

“So far, maybe take that a step further, not much reaction in the stock market, not much reaction in the bond market either. To some extent that is evidence they’ve delivered exactly to expectations but that is going to run out at some point. There is still a disconnect – the market is expecting we will see a hike or two next year and the Fed is guiding that it is going to be a year or more until we see that shift So at some point those two are going to come into conflict but we just haven’t hit that point yet.

“If you want to read a little more into the release, there is a tangible upgrade in their assessment of the economy, both in terms of the labor market and there is a line in there in terms of the substantial risk posed by the pandemic that was just rephrased to say risks still remain rather than these are substantial risks. There is definitely a tiptoe towards a more optimistic assessment that is maybe in line with the market but it is very much tiptoeing in the direction of a stronger economic backdrop that could potentially justify tapering and eventual rate increases.”

BRIAN COULTON, CHIEF ECONOMIST, FITCH (email)

“The Fed is sounding decidedly more upbeat on the economy but is in absolutely no rush to start debating modifications to its policy trajectory. The statement acknowledges the recent boost to the recovery from the vaccine rollout and fiscal policy easing and drops the word ‘considerable’ from its description of risks to the economic outlook. Nevertheless the pick -up in inflation is largely dismissed as transitory, sectors hit hardest by the pandemic are described as remaining weak and there is no hint that the ‘substantial further progress’ needed before tapering asset purchases is getting materially closer. We now think the Fed will start to discuss tapering over the summer but the actual taper probably still won’t happen until the turn of the year.”

Compiled by the U.S. Finance & Markets Breaking News team

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