July 26, 2017 / 7:00 PM / in 5 months

Instant View: Fed holds rates steady; sees balance sheet normalization starting 'relatively soon'

(Reuters) - The Federal Reserve kept interest rates unchanged on Wednesday and said it expected to start winding down its massive holdings of bonds “relatively soon” in a sign of confidence in the U.S. economy.

KEY POINTS:

* FOMC says: “Committee expects to begin implementing its balance sheet normalization program relatively soon” (vs “this year” in June statement)

* FOMC appears to strengthen characterization of current inflation trend, removing word “somewhat” to describe how far inflation measures are running below its 2 percent target at present

* Looking ahead, however, FOMC sees inflation remaining “somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term” (unchanged from June)

COMMENTS:

OMER ESINER, CHIEF MARKET ANALYST, COMMONWEALTH FX, WASHINGTON:

”The statement was mildly more dovish than expected. The Fed’s assessment of the inflation backdrop amounted to a very modest downgrade of the overall inflation situation and could signal slightly more concern on the part of the Fed with respect to their forecast for inflation.

”In the past, the Fed had said that inflation has declined ‘somewhat.’ I think they took that ‘somewhat’ word out. That, I think, is a signal that it’s a slightly more cautious tone.

”Outside of that, the language of that we got on balance sheet reduction was probably the clearest yet that a likely beginning of that process is going to take place in September.

“Overall, this statement was not too dramatically changed from the previous statements, but that modest, kind of downgrade, of the inflation situation is likely what is sending the dollar and Treasury yields sharply lower.”

MARKUS SCHOMER, CHIEF ECONOMIST, PINEBRIDGE INVESTMENTS, NEW YORK:

“This is one of the most boring statements for awhile. They need to rethink about these intra-press conference meetings which are meaningless now. On the rate hike front, we know nothing more with inflation running below 2 percent. They still expect inflation would go back to the medium term, which is not different from what they have been saying. It doesn’t mean they will stop raising rates because of that. They are still a bit away from their expected neutral rate which is between 1.75 percent to 2.25 percent. On the balance sheet, we had assumed it would start October, but it doesn’t matter whether it’s September, October or November. What will matter going forward is growth the GDP report on Friday and other data like retail sales. Inflation which I forecast to be about 1.6 percent at the end of 2017 will be stuck here for awhile.”

WARD MCCARTHY, CHIEF FINANCIAL ECONOMIST, MANAGING DIRECTOR FIXED INCOME, JEFFERIES LLC, NEW YORK:

“We interpret this change in (balance sheet) guidance as an indication that the FOMC could make an official announcement to begin balance sheet normalization as soon as September. However, the descriptor ‘relatively’ gives policymakers some wiggle room in the event that the labor market and/or inflation data –or possibly a debt ceiling crisis—gives the FOMC cold feet in September.”

“The tone of the policy statement is similar to recent prior policy statements, but does put a bit more emphasis on inflation ‘running below 2 percent’.”

“In sum, the policy statement still points to the continuation of rate and balance sheet normalization but elevated the recent deceleration in inflation from being a difficult-to-understand annoyance to a development that could delay both rate and balance sheet normalization.”

SCOTT ANDERSON, CHIEF ECONOMIST, BANK OF THE WEST, SAN FRANCISCO:

”They’re tipping off to the markets that if the outlook continues to evolve as they expect then September is when they will announce the balance sheet reductions.

“It’s a nod to the doves that we’re getting concerned with the low inflationary environment, but I don’t think it delays the balance sheet reduction. The reason why the markets are reacting the way they are in the wake of the statements is the low possibility of interest rate hikes going forward. December is a low possibility for rate hikes.”

CHRISTOPHER J. MOLUMPHY, CHIEF INVESTMENT OFFICER, FRANKLIN TEMPLETON FIXED INCOME GROUP, SAN MATEO, CALIFORNIA:

“As is typical, there’s only a few words different, so the market’s trying to digest. On first blush two key issues: the one is any news on unwinding of the balance sheet, which the market’s focusing on and then secondly views on inflation in terms of how that’s going to eventually impact policy for the remainder of the year.”

“With respect to the unwind of the balance sheet, as is typical I think looking at the statement there’s a two-word difference – ‘relatively soon,’ that’s the new data. So the market’s working with that trying to interpret what ‘relatively soon’ might mean. Our best guess might be next meeting, in September, but importantly the Fed has already laid out a path of unwinding the balance sheet, which they did at the last meeting and the market has taken that exceedingly well. So from our viewpoint the Fed would be wise to move forward while the market’s still fully accepting this gradual approach to balance sheet unwind.”

ADAM BUTTON, CHIEF CURRENCY ANALYST, FOREXLIVE, MONTREAL:

“The U.S. dollar fell on the FOMC statement for two reasons: The first is that starting the runoff ‘relatively soon’ isn’t the same as ‘soon’ and leaves open the option of waiting beyond September. The second is that all the talk in the lead-up to the decision was about some kind of hawkish surprise. It’s clear the market was positioned that way, it didn’t happen, so bets on the dollar cleared out. Expect the dollar to stabilize quickly and for the market to refocus on data.”

JJ KINAHAN, CHIEF MARKET STRATEGIST, TD AMERITRADE, CHICAGO:

”S&P’s liked it a bit, bonds have no idea what to think for it and the dollar didn’t really care for it would be the way to sum it up best. They didn’t change too much - they gave a little bit of a forewarning on the job market, the way they said it started to moderate, I would say taper. 

”They are voicing a little bit of concern that if the job market sort of stays steady, inflation pressure is nonexistent if the energy market doesn’t supply it, that they are going to be caught in a little bit of a difficult situation going forward. You see it from fed funds telling us we have about a 50/50 chance for a December rate hike. They are, I don’t want to use the word trapped because the market has kind of bailed them out with one event or another, but they are in a tough spot here for the rest of 2017. Even that last hike looks like it might be a difficult one to make.

“They changed their wording (on inflation) last meeting to ‘around 2 percent’ from ‘2 percent,’ that certainly gives them some wiggle room. The fact of the matter is there has been zero cooperation from the energy market and that is usually the greatest source of inflation. The other thing they were saying is if the job market is tapering that lightens wage pressure too.”

HEIDI LEARNER, CHIEF ECONOMIST, SAVILLS STUDLEY, SAVILLS PLC, NEW YORK:

”I don’t really think there’s much of anything here other than a reiteration that they’re going to start soon in terms of turning down the balance sheet.

”It’s certainly what the Street expected. There’s nothing that we haven’t heard already heard.

“It’s hard to argue that there are any surprises here whatsoever. This is probably the most expected message we could have envisioned. No dissent. The news is that there’s no news.”

JOE COLLERAN,  HEAD TRADER, BANK LEUMI, NEW YORK:

“This hasn’t changed anybody’s opinion. The clear bellwether for a rate hike is inflation. They seemed comfortable with the last announcement on growth. This will give people reason to bring equities higher. For the bond market, it will be on inflation watch every month. With balance sheet normalization, I think 100 percent they want to make the announcement in September. A December rate hike is a very high probability unless inflation continues to soften and they think it’s the wrong thing to do.” 

MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISER AT ALLIANZ, NEWPORT BEACH, CALIFORNIA:

“This purposely milquetoast statement by the Fed is in line with market expectations. It speaks to a steady-as-it-goes approach to monetary policy notwithstanding the unusual fluidity in the underlying economic and political context.”

ON INFLATION: “Markets expected that given the decline in inflation readings. Markets will interpret the statement as reinforcing the notion of a slow and gradual ‘beautiful normalization’ of monetary policy; this after years of heavy reliance on unconventional monetary policy.”

BRIAN JACOBSEN, SENIOR INVESTMENT STRATEGIST, WELLS FARGO FUNDS MANAGEMENT, MENOMONEE FALLS, WISCONSIN:“Without mentioning September, the Fed all but told the market the balance sheet run-off will start in September. The economic assessment improved with the recent rebound in the payrolls number. They’re still clinging onto the hope that inflation will rise to their target of 2 percent.”

AARON KOHLI, INTEREST RATE STRATEGIST, BMO CAPITAL MARKETS, NEW YORK:

“They were very balanced. If you rank the outcomes that they could have hoped for this is probably the best one. They didn’t give the market any new information really to trade. They acknowledged inflation weakness, which was the dovish part of the statement, and they also kept a fairly tight leash on the market by basically implying that they are ready to taper relatively soon. It strikes that good balance between sounding certain about a very likely September taper and acknowledging that some of the risks are there as well, specifically to inflation.”

JASON PRIDE, DIRECTOR OF INVESTMENT STRATEGY, GLENMEDE, PHILADELPHIA:

“The market was pricing a near-zero percent chance of a rate hike at today’s meeting, so the no-rate-hike decision should be no surprise. Investors are already trying to anticipate not only the next rate hike but the initiation of quantitative tightening as well. We continue to believe that a move of some form in 2017 is the most likely outcome given the ongoing expansion, but needs to be very careful regarding the pace of this tightening.”

MARKET REACTION:

STOCKS: Stocks little changed from 2 p.m. level. The S&P 500 remains up fractionally on the day

BONDS: Most U.S. Treasury yields fall to session lows, 2s last at 1.355 pct, down 4 basis points on the day (largest yield drop since May); 10s below 2.29 pct; 2-10 spread flattens, last near 93.4 basis points

FOREX: The U.S. dollar ticks lower against the euro and yen

RATE FUTURES: Tick up to session high; December rate hike probability slips to about 40 pct

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below