(Reuters) - The Federal Reserve hiked interest rates for the first time in nearly a decade on Wednesday, signaling 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.
MIKE MATERASSO, SENIOR VICE PRESIDENT & CO-CHAIR FIXED INCOME POLICY COMMITTEE, FRANKLIN TEMPLETON, NEW YORK:
“Yellen’s press conferences have been erratic. This is one of the better ones. Now we have this out the way. There is a pretty big divergence between the Fed’s projection on the fed funds rate and what the market has priced in. There lies where the volatility will be.
“Come tomorrow, the market will focus back on oil and volatility that might result from that. The underpinnings to the domestic economy is very good. The consumers are in very good shape. That gives legs to the economy or provides cushion against shocks. Near term, there is a tremendous amount of volatility due to year-end illiquidity. We see potential adds in investment-grade corporate credit and to a lesser extent in high-yield. We also see a continuing flattening yield curve.”
SCOTT BROWN, CHIEF ECONOMIST AT RAYMOND JAMES IN ST. PETERSBURG, FLORIDA:
“I think they did a good job of simplifying, putting along the technical stuff (discount rate, IOER, reverse repos) in separate statements. The message is the same as we’ve been hearing over the last couple of months: 1) policy will still be accommodative for some time; 2) future policy action will be data-dependent; and 3) economic conditions are expected to evolve in such a way as to warrant a gradual path of rate increases.
“The dot plot still showed some dispersion in the policy outlook among the individual Fed officials, but a lot less than in September. The dot plot shows an expectation of 100 basis points over the course of 2016, or 25 bps at every other policy meeting (most likely in March, June, September, and December) – that may change if we get a surprise (growth stronger or weaker than anticipated), but it’s the base-case scenario. There’s been a ridiculous amount of anxiety in the financial markets regarding the timing of this initial move, including strains in emerging economies, but the Fed policy outlook should now be mostly baked into the market. A relief rally in equities makes a lot of sense.”
PETE KARABATOS, SENIOR CURRENCY TRADER, SILICON VALLEY BANK, SANTA CLARA, CALIFORNIA:
“It’s going to be a gradual process of normalizing rates. The Fed will be data dependent. They will reinvest their principal and interest from their bond holdings, which suggest they will still provide a lot of policy accommodation. I’m still generally bullish on the dollar. We are seeing a continued divergence in central bank policies, with the relative strength in the United States versus the rest of the world. The Fed alluded the strength in the dollar that has kept inflation tame and lowered oil prices. I think inflation will eventually move toward 2 percent. My personal view is that the dollar could test parity versus the euro next year.”
CRAIG BRANDON, CO-DIRECTOR, MUNICIPAL BONDS, EATON VANCE, BOSTON:
“Going forward, I think it is going to be the same old story of watching the data every single day to see what inflation and inflation expectations are going to be. I think the employment number is fine and the Fed is going to focus on inflation. I think there will be a lot of attention spent on inflation data going forward to see how measured and gradual the future rate increases are going to be.”
ALFONSO ESPARZA, SENIOR CURRENCY STRATEGIST, OANDA, TORONTO:
“The hike has been highly anticipated and its final arrival did not cause the dollar to appreciate beyond current levels. The rhetoric from the Fed statement remains accommodative, but its data-dependent guidance will continue to bring uncertainty and volatility in 2016.”
BRAD MCMILLAN, CHIEF INVESTMENT OFFICER AT COMMONWEALTH FINANCIAL NETWORK IN WALTHAM, MASSACHUSETTS:
“First of all, she played it right down the middle of the fairway. This is more or less what everyone was expecting. We got a quarter point. We got a promise of gradual increases. We got the dot plot that says gradual probably means about 100 basis points next year, which would be about 25 basis points every other meeting. We know what she’s thinking, we know how they’re probably going to go about it, and it’s exactly in line with what they were saying. On the one sense they pulled something off with absolutely no surprises, so I think they deserve kudos for that.
“Second of all, I think the initial market reaction has been positive but it’s starting to pull back. I think the initial reaction is, ‘Yes we’re starting to get back to normal, the Fed feels confident,’ and that accounted for kind of the initial pop. Now they’re thinking, ‘This is actually just in line with what people were expecting so there’s not a lot of news here.’
“My guess would be we’re going to end up with a bit of an increase (in equities today) largely due to a reduction in uncertainty.
“I think longer term, this is a positive. It’s one more step towards normalization, it’s a ratification of the fact that the economy is continuing to grow. We have a notoriously scaredy-cat Fed that’s willing to move, so that makes a lot of people who might otherwise have been nervous feel better.”
ANTHONY VALERI, FIXED INCOME STRATEGIST AT LPL FINANCIAL IN SAN DIEGO:
“It seems like the press conference so far is slightly dovish. The result is as expected as you could get. The one minor surprise is that the dot plots weren’t as revised as low as expected. The market expectation going into the meeting was they would temper rate hike by showing future hikes would be gradual and forecasts would come down by 25 basis points in 2016 and 2017 and that didn’t quite happen. It’s mildly hawkish if you could call it that. Expectation for GDP growth was increased, which is a mil positive and inflation down, which was not surprising. All in all slightly hawkish on forecast part of it. We’ll see if she changes that in the rest of statement.
The long end of the curve is higher post Fed and the short-end slightly weaker, which is not entirely surprising. The message from he bond market has been that a rate hike might do more to slow economy and flattening of curve suggests that story is still This is a gradual flattening, not a big move because most of this is priced in but might change. Long-end may hold up better as short end slows in anticipation of future hikes.
CHRIS PROBYN, CHIEF ECONOMIST, STATE STREET GLOBAL ADVISORS, BOSTON:
“It wasn’t necessary for the Fed to raise interest rates. There is no sign of wage inflation, there is no sign of price inflation, but they have signaled that they were eager to get off the zero-bound rate. And I think, that is correct. Having interest rates at zero is appropriate when the economy is tanking and the unemployment is headed toward 10, but not when the economy is expanding steadily. It is important to note that this may be the first in several hikes, but I don’t think it’s necessary for the Fed to go so quickly. What does this mean for the market? This portends periods of volatility as the market wrestles about whether the Fed will raise rates at the next meeting after that.”
R.J. GALLO, SENIOR PORTFOLIO MANAGER, FEDERATED INVESTORS, PITTSBURGH, PENNSYLVANIA:
“I was surprised that the migration of dots was so minor…. The tone of the statement, which twice uses the term ‘gradual’… would be reinforced by a gradual migration downward of the dots, and you largely didn’t get it.”
KEVIN GIDDIS, HEAD OF FIXED INCOME AT RAYMOND JAMES IN MEMPHIS:
“We’ll end up right where we started today. I think we will learn a lot more from the chair’s press conference. This move is exactly what market expected and wanted. We’ll be looking at language about the pace of the increase. What do they mean by “gradual” adjustment, what are they looking at other than employment and inflation?
“We’re watching the dollar closely in the coming days. There could be some pressure there. The pace of adjustment will affect long rate movements.”
JOHN AUGUSTINE, CIO OF HUNTINGTON WEALTH & INVESTMENT MANAGEMENT, COLUMBUS, OHIO:
“This was a Santa Claus statement. They gave everybody what they wanted: gave savers a little bit more interest, investors a little bit more confidence in the economy, businesses a little bit more expectation of inflation, and helped governments by keeping the yield curve flat.
“What caught our attention the most was that it was a hawkish stance and a dovish statement. They went up a full quarter, when we thought they would go up to 25 basis points flat, and they greatly increased their future flexibility by bringing in the terms financial and international developments. Short-term fixed income becomes more attractive now, TIPS do if the Fed is right that we might get some inflation this year, and dividend growth looks more attractive than dividend yield.”
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 labor 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 labor 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 program, 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 IN NEW YORK:
“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 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.”
“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 toward 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 realize 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
Americas Economics and Markets Desk; +1-646 223-6300