NEW YORK (Reuters) - The Federal Reserve on Wednesday projected a rapid jump in U.S. economic growth and inflation this year as the COVID-19 crisis winds down, and repeated its pledge to keep its target interest rate near zero for years to come.
POWELL PRESS CONF:
** Powell says one-time increases in prices likely to have only transient impact on inflation
** Powell says a transitory rise in inflation above 2% will not meet standard for raising rates
** Powell says economy is a long way from employment, inflation goals
** Powell says not time to start talking about taper yet
** Powell says we will want to provide as much advance notice of taper as possible
** Powell says when we see data that shows we are on track to achieving substantial progress, we will say that
** Powell says ‘strong bulk’ of FOMC is not showing a rate increase through 2023
** Powell says we will have something to announce on leverage ratio in coming days
** Powell: we are going to look at racial disparities as a form of labor market slack
** Powell says fiscal policy overall will have really helped us to avoid much of scarring we were concerned about
** Powell says fiscal policy will accelerate return to max employment
** Fed leaves key overnight interest rate unchanged at 0-0.25%, says committed to using full range of tools to support economy
** Fed will continue to increase bond purchases by at least $80 bln/month of treasuries and $40 bln/month of mbs
** Fed says indicators of economic activity and employment have turned up recently following a moderation in the pace of the recovery
** Fed says inflation continues to run below 2 percent
** Fed says will conduct overnight reverse repurchase agreement with a per-counterparty limit of $80 billion per day, effective march 18, 2021
** Fed policymakers continue to see no rate hikes through 2023: median forecast in summary of economic projections
** Four Fed policymakers see liftoff in fed funds rate from zero in 2022, seven see liftoff in 2023
STOCKS: The S&P 500 reversed a 0.5% loss and was last up 0.35%
BONDS: The 10-year U.S. Treasury note yield fell more than 3 bps to 1.6268% and the 2-year yield slipped to 0.1330%
FOREX: The dollar index turned 0.41% lower, from slightly higher before the statement
ALEJO CZERWONKO, CHIEF INVESTMENT OFFICER EMERGING MARKETS AMERICAS, UBS FINANCIAL SERVICES INC, NEW YORK
“There was about a 1% turnaround in a matter of seconds for the Mexican peso and you’re seeing something similar in other currencies including the Brazilian real. Overall it hasn’t been that dramatic but it’s been a positive for the emerging markets currency space.
“Market participants were expecting the median dot for 2023 to move to one hike, or some people were even talking about two hikes. The median dots for 2023 remained at zero hikes. We’ve seen no changes in Fed QE outlook so in this regard, no news is good news. No hint of tapering is good news. And when it comes to inflation expectations the Fed does see a pickup in inflation in the near term but continues to project inflation very close to 2% over the medium term, which is also dovish from the perspective that if that’s the case, why hike.”
KENT INSLEY, CIO, TIEDEMANN ADVISORS, NEW YORK (email)
“Continued Fed accommodation, low interest rates, and the increase in credit downgrades and defaults make diversified assets, including corporate and structured credit (both less liquid), high-yield mortgage-backed securities, and European credit markets currently offer far more attractive return potential than traditionally stable assets.”
“These assets have also been absent from Fed purchase programs, and have upside in a reflationary environment, especially in sectors most adversely impacted by the pandemic.”
WILLEM SELS, CHIEF INVESTMENT OFFICER, PRIVATE BANKING AND WEALTH MANAGEMENT, HSBC
“The message the Fed has sent today is in line with our view, namely that the process will be gradual. This means that we are in a very different situation than 2013, where bond tapering caught the market by surprise, leading the real yield to spike quickly and significantly, and causing equities, gold and risk assets to sell off.
“In our view, the combination of still low yields, very slow and gradual normalisation of policy, and the improving economic outlook, remains a positive mix for risk assets. Technology and green tech stocks that sold off in early March, due to rising bond yields, stand to benefit from the Fed’s stabilizing message, and in our view, the recent dip is a medium-term buying opportunity.”
ANTHONY DENIER, CEO, TRADING PLATFORM WEBULL
“There was just a lot of anxiety which definitely pumped-up bond yields so far, but the Fed’s very dovish kind of response for a quite strong economic outlook is a big sigh of relief which we think could help maintain yields at current levels if not slow them down a little in the short term.”
JASON WARE, CHIEF INVESTMENT OFFICER, ALBION FINANCIAL, UTAH
“Right in line with our views, the Fed now sees the US economy stronger this year, inflation getting a boost, but both ultimately settling back in to a more structural path of 2% or so ... both for real GDP and inflation. As such, the Fed will likely exercise patience on rate hikes until 2023 - also in line with our expectations.”
SEEMA SHAH, CHIEF STRATEGIST AT PRINCIPAL GLOBAL INVESTORS IN LONDON (email)
“In what was one of the most important Fed meetings in some time, market eyes were keenly trained on the new economic forecasts and the updated dot plot. The Fed certainly gave the market some meat to chew on, raising its economic growth forecast for 2021 significantly to 6.5%. The implication of this projection is that, at some point in 2022, US GDP will exceed its pre-pandemic path. Considering the disruption and economic upheaval of the last year, this is mind-blowing. It’s even more remarkable when you consider that after the Great Financial Crisis, the US economy never regained its pre-recession path.
“Despite this very strong outlook, the Fed played down the risk from inflation, with their projections showing a very modest and, importantly, only temporary overshoot of their 2% target – certainly a more subdued inflation outlook than many investors were fearing. Equity markets should find some reassurance in those forecasts, although there will likely be some bond market fright from the latest dot plot which showed that a few more members of the FOMC think they may start raising interest rates in 2023.”
GUY LEBAS, CHIEF FIXED INCOME STRATEGIST, JANNEY MONTGOMERY SCOTT, PHILADELPHIA
“This statement is about as close to unchanged as it gets…I think the markets, with the exception of high frequency algorithms which respond most immediately, don’t put a ton of stock in the ‘dot plots’ in determining Fed policy, because each of our own economic forecasts take that into account. The front-end of the curve’s still pricing in a rate hike in 2023, regardless of where the dots are going to go from the Fed. That said, I think the regional policy makers are most likely to be the optimistic ones if history is any indication, they’re also the least likely to be the voters when it comes to decision time, and they are the least influential in the process.”
“What (the increase in the caps in the reverse repo facility) is likely to do is floor overnight rates at zero, or at least get a heck of a lot closer to enforcing the floor at zero. Fully uncapping the RRP would essentially lock things in, raising the cap helps. If you’re a money market fund who’s looking to park cash for the day, the RRP is guaranteed not to go negative, and having that ability to put your cash somewhere where rates aren’t going to go negative is very helpful to the money fund complex. It may on the margin drain some reserves from banks.”
CHRISTOPHER SMART, CHIEF GLOBAL STRATEGIST, BARINGS INVESTMENT INSTITUTE, BOSTON
“Frankly, there’s not much new here, because it doesn’t answer the question that the market wants to have answered, which is if Powell is worried about rates and yields rising too quickly. And that’s an answer, they’ll try extract during the press conference. His answer will be interpreted as not committed enough, an iron clad.
“Powell is in a very difficult position. He has to reflect realty, which has improved since the last time he spoke to reporters. On the other hand, he has to show that he is supporting the recovery and is not going to take the punch bowl away.
“(The new GDP estimate is) sort of a shocking number to the extent that officially the United States government believes it will grow faster than the Chinese government believes it will grow this year. So that’s a little bit of a head-turning moment for investors. But it doesn’t really tell us much other than the fact that last year was a really bad year and this year is going to be a good year. Markets are going to be focused on next year. And what will happen as policy becomes less supportive when we’re forced to start reacting to conditions if they continue to improve.”
SILVIA DALL’ANGELO, SENIOR ECONOMIST, THE INTERNATIONAL BUSINESS OF FEDERATED HERMES
“Going into today’s meeting the Fed faced a communication challenge: it had to acknowledge recent positive news implying upside risks to the economic outlook, while also preventing an excessive market reaction leading to an unjustified tightening of financial conditions.
“In the event, the Fed managed to balance the two needs. It upgraded its short-term growth forecasts aggressively, reflecting the impact from the latest $1.9tn fiscal injection, positive vaccine rollout and upside surprises in data. However, it also restated its determination to keep monetary conditions very accommodative in the foreseeable future.”
PAUL NOLTE, PORTFOLIO MANAGER, KINGSVIEW INVESTMENT MANAGEMENT, CHICAGO
“Basically my read on it is by their take the economy is doing well, and they’re confirming they’re not going to be raising rates anytime soon and will allow the economy and financial markets, for that matter, to run hot for a while.
“Part of (stocks paring losses) is because the Fed is staying out of the market. They’re not looking to increase rates or anything like that and, in the back of the market’s mind at least, that was a possibility.”
“To me the surprise move has actually been in high yield. It was negative and has flipped over positive and so for us that is a very good sign of risk appetite and it remains pretty strong.”
BRIAN COULTON, CHIEF ECONOMIST, FITCH (email)
“The Fed does not seem worried at all about the rise in inflation expectations signaled by the bond market. Despite the reference to the recent upturn in activity data, a 2.3 pp increase in their 2021 GDP growth forecast and a 2023 unemployment forecast of 3.5%, there is no hint at any change in policy trajectory. A clear majority of the dots (11 out of 18) still see no rate hike even by end 2023. When the facts change this much and policy guidance doesn’t move at all it’s pretty clear the Fed’s reaction function has shifted.”
MAZEN ISSA, SENIOR CURRENCY ANALYST, TD SECURITIES, NEW YORK
“I don’t think this is necessarily going to return the dollar to a downtrend.” In order for that to resume the Euro needs to gather upside momentum. The European economy is very far from matching growth expectations in the U.S.”
DAVID CARTER, CHIEF INVESTMENT OFFICER, LENOX WEALTH ADVISORS, NEW YORK
“The Fed statement today was more optimistic than some expected, they raised their outlook for both economic growth and the labor market. The market’s view of the statement is that it was fairly optimistic.
“More than anything now it’s the press conference where the more meaningful information is released. The statement can be impactful, but the press conference can often convey more important information about the Fed’s future plans. All eyes will be on the press conference and any discussion about the dot plot, tapering and tightening.
“Investors will want to understand if the recent fiscal stimulus plan has meaningfully changed (the Fed’s) outlook. The market will also want to know if the Fed is more worried about inflation rates or interest rates.”
Compiled by the U.S. Finance & Markets Breaking News team
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