January 31, 2018 / 7:24 PM / 9 months ago

Instant View: Fed leaves rates unchanged, sees inflation firming

(Reuters) - The U.S. Federal Reserve kept interest rates unchanged on Wednesday but said it anticipated inflation would rise this year, in a sign it is still on track to raise borrowing costs again in March under incoming central bank chief Jerome Powell.

KEY POINTS:

- Fed says annualized inflation expected to move up this year

- Fed drops language on inflation expected to expected to remain at 2 percent this year.

- FOMC unanimously selects Fed Governor Jerome Powell as chairman to replace Janet Yellen

COMMENTS:

DAVID KOTOK, CHAIRMAN AND CHIEF INVESTMENT OFFICER, CUMBERLAND ADVISORS, FLORIDA:

“No surprise, an affirmation of this policy direction that will lead to higher rates and the continuing shrinking of the balance sheet. To shrink the balance sheet and raise the policy rate - and at the same time the deficit will expand predictably - means that three forces will be at work against the bond market, which will work to elevate interest rates. There’s a fourth force lurking, which is huge and it’s the ECB moving away from negative rates. The negative rates from the ECB and (their) policy has been a force that has sucked down interest rates in the US.”

MIKE TERWILLIGER, PORTFOLIO MANAGER, RESOURCE CREDIT INCOME FUND, NEW YORK

“On the eve of the ‘Big Game’ (NFL Super Bowl) this weekend, to borrow a football expression, ‘Do Your Job’ for the FOMC means combating inflation. The Fed’s acknowledgment of the quickening pace of inflation today put three hikes in 2018 into the ‘base-case’ and perhaps raises the prospects for a fourth.”

SCOTT KIMBALL, DIRECTOR AND PORTFOLIO MANAGER, BMO GLOBAL ASSET MANAGEMENT, MIAMI

“All things considered, I’d have a hard time thinking that anyone walked away with any kind of surprise here. It was Janet Yellen’s last meeting, and rates were unchanged, as expected. In the language of the Fed, they say monetary policy remains accommodative, which makes sense, and that inflation is likely to reach targets in the medium term.

“The subtle message is that they will continue to press rates higher. Their end game is not to get to a restrictive state.”

JASON WARE, CHIEF INVESTMENT OFFICER & CHIEF ECONOMIST, ALBION FINANCIAL GROUP, SALT LAKE CITY

“It’s right in line with what I expected, no change in rates, no change in the balance sheet reduction pace; it’s a gentle hand-off to Jerome Powell, it is ‘The economy is doing OK; we’re not changing anything in terms of the outlook to the economy, but inflation might be starting to creep up a bit.’ That’s what we got. Markets are saying it’s not hawkish or dovish, it’s very neutral.”

KEVIN LOGAN, CHIEF U.S. ECONOMIST AT HSBC SECURITIES, NEW YORK

“One important thing did change: In December they said that inflation expectations on a 12-month basis are expected to remain below 2 percent in the near term. This time they said inflation on a 12-month basis is expected to move up this year and to stabilize near the target … So they’re more confident in their expectations of rising inflation.”

“At the margin you could say that this might suggest that three rate hikes are more likely than two.”

JJ KINAHAN, CHIEF MARKET STRATEGIST, TD AMERITRADE, CHICAGO

“They expect economic conditions will evolve to warrant further gradual increases. That is what we all said. Maybe people were looking for a hint of three or four (hikes) but there is nothing there that would hint towards that.”

BRIAN BATTLE, DIRECTOR OF TRADING AT PERFORMANCE TRUST CAPITAL PARTNERS, CHICAGO

“There was no surprise, no change. There was some slightly more aggressive text about the economy evolving and the need for gradual increases.”

“It was a good, maybe slightly more hawkish, meeting. The important thing was that it was unanimous vote for no change to rates.”

“It should be a worry for equities and the bond market that the Fed might be more aggressive than it has been in the past.”

RANDY FREDERICK, VICE PRESIDENT OF TRADING AND DERIVATIVES FOR CHARLES SCHWAB, AUSTIN, TEXAS

“It looked pretty much as expected. I did not see anything that surprised me. There were no dissents. They are expecting gradually rising rates. They expect inflation, which is still below target, to creep up towards two percent. Pretty much right in line with what I would have expected. I think the market reaction was very subdued, at least till this point.”

RANDY FREDERICK, VICE PRESIDENT OF TRADING AND DERIVATIVES, CHARLES SCHWAB, AUSTIN, TEXAS

    “It looked pretty much as expected. I did not see anything that surprised me. There were no dissents. They are expecting gradually rising rates. They expect inflation, which is still below target, to creep up towards two percent. Pretty much right in line with what I would have expected. I think the market reaction was very subdued, at least ‘til this point. Net-net it was pretty much unchanged on everything.”

WALTER TODD, CHIEF INVESTMENT OFFICER, GREENWOOD CAPITAL, GREENWOOD, SOUTH CAROLINA

“This doesn’t change the outlook for the Fed for 2018. It still looks like they are on pace to do continued, gradual hikes, probably three this year.”

“I would classify it as right down the middle, neither hawkish or dovish.”

“A couple years ago, everybody watched the Fed with a fine-toothed comb and I think as this economic cycle has started to accelerate, these meetings have become a little bit less and less important. Certainly the ones where you’re not expecting anything to happen, which is the case here — no press conference, no hike expected. So I don’t think it means a whole lot for the market.”

BRUCE BITTLES, CHIEF INVESTMENT STRATEGIST, ROBERT W. BAIRD & CO, SARASOTA, FLORIDA

    “It’s more of the same. Equity markets are rallying a little on that. The Fed kept rates the same yet the economy is doing well. That’s a good configuration for equity markets.”

    “The Fed left open the door for a March increase but that’s built in already. As long as the yield on the 10-year (Treasury bond) continues to behave and stay below 3 percent, Fed policy is not likely to hurt the stock market.”

MARKET REACTION:

STOCKS: The S&P 500 firmed then backed off slightly and was last trading up 0.18 percent

BONDS: U.S. Treasury yields firmed, 2s were near 2.16 pct; 10s about 2.75 pct; 2-10 spread was at 59.33 basis points

FOREX: The U.S. dollar firmed a bit against the euro and yen

Compiled by Alden Bentley

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