NEW YORK (Reuters) - The Federal Reserve held interest rates steady on Wednesday as policymakers took heart in continued U.S. job gains and economic growth and held out hope that weak inflation will edge higher.
“The labor market remains strong ... economic activity rose at a solid rate” in recent weeks, the U.S. central bank said in a policy statement a day after President Donald Trump called on the Fed to cut rates by a full percentage point and take other steps to stimulate the economy. STORY:
STOCKS: After holding steady in the wake of the Fed announcement, the S&P 500 dropped following Fed chair Jerome Powell’s news conference. The benchmark index was down -0.65% late Wednesday. BONDS: The 10-year U.S. Treasury note yield fell to 2.46% in the wake of the FOMC decision but now trading around 2.51% and the 2-year yield, which fell to 2.24% following the FOMC decision, is now trading at 2.30%
FOREX: The dollar index pared their losses briefly and was down 0.238%.
BRIAN BATTLE, DIRECTOR OF TRADING AT PERFORMANCE TRUST CAPITAL PARTNERS, CHICAGO
On why U.S. stocks came under selling pressure after Powell’s news conference “He is making the case that a rate increase is possible, not forgone conclusion it’s a cut only. Everything he is saying could support a cut, and an increase. Powell just said: ‘We will move if the data justifies it in either direction’.”
PAUL NOLTE, PORTFOLIO MANAGER, KINGSVIEW ASSET MANAGEMENT, CHICAGO
“They’re sitting on the sidelines, going to be patient, so Goldilocks continues. That’s part of the reason why you see a pop in the (stock) averages. One of the first questions that will likely come is how Powell feels about Trump’s tweets.
The era of zero interest rates, low interest rates hasn’t done anything to engender inflation. If you go back in time, inflation comes with significantly higher wage growth and constrained supplies, and we don’t have that. As long as the Fed is on the sidelines and not keyed on raising rates, that’s good for equities. Equities just love low interest rates. It allows companies to buy back stocks by the bucketful, which is what they’ve been doing.”
RANDY FREDERICK, VICE PRESIDENT OF TRADING AND DERIVATIVES, CHARLES SCHWAB, AUSTIN, TEXAS
“It’s pretty much exactly what everybody expected. They noted stronger economic growth, weaker inflation and said they will continue to be patient and look at the data. They are indifferent about whether the next move will be a rate hike or a cut, which I think is the right thing for them to say, because I don’t think they want to foreshadow that to the market. It was clearly a unanimous decision.
I don’t think the president is going to be very happy about it. The president says we should cut interest rates by (1 percentage point), which is ludicrous when the market is literally at all-time highs and the labor market is at a 50-year peak.”
JOE MANIMBO, SENIOR MARKET ANALYST, WESTERN UNION BUSINESS SOLUTIONS, WASHINGTON
“The Fed sounded hawkish on growth but dovish on inflation. On balance, the Fed appeared to walk a neutral line. The Fed’s overall tone was consistent with the view that U.S. interest rates have peaked for now, a notion that could leave the dollar vulnerable.”
MICHAEL ANTONELLI, MARKET STRATEGIST AT ROBERT W. BAIRD, MILWAUKEE
“Expectations were that the Fed would say and do nothing with interest rates. What we got was essentially that, with a little hint they’re worried about inflation being too low. The Fed is one of the most powerful forces impacting the stock market. Them being worried about disinflation and weak economic data makes them less likely to hike which stock market investors would cheer.”
Looking at futures he said: “There’s no change in what the market thinks about the Fed path. At the border the Fed is coming across as slightly more dovish.”
BRETT EWING, CHIEF MARKET STRATEGIST AT FIRST FRANKLIN FINANCIAL SERVICES, TALLAHASSEE, FLORIDA
“I like the statement. They acknowledged that inflation was below their target, they are standing pat and I think in their mind they feel that the economy can work through this soft patch. Jobs look good, economic activity was solid, these are good comments out of there, but I think they acknowledged the 800-pound gorilla in the room – lower inflation. I like that they stayed neutral here and they did not move to a more dovish stance. I know that a lot of the economic data that has come out has been soft. But the way we look at it is there is a lot of uncertainty that has been removed recently with the Federal Reserve, trade tensions and the job market seems to be very strong, we are getting real wage growth above inflation. We are 70% consumption, the stock market is a leading indicator, it’s at an all-time high. So lower uncertainty, great jobs, wage growth, wealth effect from a higher stock market, that’s going to translate in the coming quarters into positive investor psychology and positive consumer psychology.”
STEPHEN MASSOCCA, SENIOR VICE PRESIDENT AT WEDBUSH SECURITIES, SAN FRANCISCO
“No surprises from the Fed, this is exactly what people thought. No one thought Trump was really going to have an impact on Powell’s thinking. I guess the pressure from the President maybe kept them from raising rates. But the other issue they run into and what keeps them from raising rates is the fact the Japanese and the Europeans continue to be very aggressive and it gets a little hard to deviate from that pattern a little bit. That starts to create some domestic issues in terms of trade and currency. They may not say it but I have to think the Fed has an eye on central banking policies elsewhere, they continue to be very aggressive and that is going to hold the Fed back.
With 3% GDP growth, you saw the ADP number today, we are heating up. It hasn’t flowed through to inflation yet so you could argue there is no need but I would think central bankers would want to get in front of any inflation. So in a normal world, they raise rates a quarter of a percent today, you might say that is good policy. But given the political environment, Trump got what he wanted, he is putting a foot on them and that has to weigh on them a little bit. They have to be thinking about it, he has been very public about it.”
IAN LYNGEN, HEAD OF U.S. RATES STRATEGY, BMO CAPITAL MARKETS, NEW YORK
“The most important development from the FOMC this afternoon was the cut of IOER (interest rate on excess reserves) to 2.35%; a drop of 5 basis points while the Committee maintained the target Fed Funds range of 2.25-2.50%. The front-end of the curve is intuitively outperforming on this ‘fine-tuning’ cut and the curve, which has been grinding flatter on the day, has snapped back steeper. This also has created an outside-day steeper for the curve - very rare - which projects to at least 28 bp in 2s/10s. [There’s] very little was changed in the statement, other than to ‘downgrade’ the current state of inflation to “On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent.” The emphasis on lowflation puts the onus on core CPI/PCE to drive the next move for the Fed — hike or cut. We’ll be listening to hear more from Powell at the press conference on this topic.”
JOSEPH SROKA, CHIEF INVESTMENT OFFICER AT NOVAPOINT, ATLANTA
“The Fed elected not to change interest rates, consistent with solid but slowing economic growth and overall tame inflation. I believe inflation running below the Fed’s 2% target is the key measure keeping them on hold. I think they plan to remain patient and evaluate data as the year unfolds. I didn’t see anything new, but a lot of comments were consistent with advance GDP data last week, where we saw some slowing in household spending, which may be caused by a labor market that while solid, doesn’t have lots of room for incremental improvement. Some of the (economic) data we’re seeing shows moderating growth, which the Fed mentioned in their statement. The engineering of the soft landing is on track. In evaluating the data if econ growth slowed at a more rapid pace, perhaps lowering the rate could be a potential later in the year.”
Americas Economics and Markets Desk; +1-646 223-6300