Instant View: Stocks sink after Fed raises rates, Powell comments on balance sheet

NEW YORK (Reuters) - U.S. stock markets tumbled on Wednesday, reversing a morning rally after the U.S. Federal Reserve delivered an expected interest rate hike but signaled its tightening cycle is nearing an end in the face of financial market volatility and slowing global growth.

Losses accelerated on comments by Fed chairman Jerome Powell at a press conference that he does not see the Fed changing its policy of keeping its balance sheet run down on autopilot.

MARKET REACTION:

STOCKS: Wall Street seesawed after the announcement from the Federal Open Market Committee, taking the latest nosedive after Chairman Jerome Powell started speaking at the post meeting press conference. The S&P 500 .SPX was last down 1.51 percent after being up more than 1 percent right before the FOMC meeting ended. The Dow .DJI was off 1.4 percent. BONDS: The 10-year U.S. Treasury note US10YT=RR yield fell to 2.7673 percent and the 2-year yield US2YT=RR fell to 2.6417 percent. FOREX: The dollar index .DXY was last off 0.1 percent.

COMMENTS:

JORGE MARISCAL, EMERGING MARKETS CHIEF INVESTMENT OFFICER, UBS GLOBAL WEALTH MANAGEMENT

“There’s worries the Fed will continue to hike into a slowing economy with no inflation to worry about.”

“After the (statement) reaffirmation of two hikes next year, Powell continued to talk up the strength of the U.S. economy and that worried investors. People are worried about growth and to hear the Fed isn’t (worried) concerns the market.”

“In turn, that supports the U.S. dollar and that is negative news for emerging markets in general.

ERIC KUBY, CHIEF INVESTMENT OFFICER, NORTH STAR INVESTMENT MANAGEMENT CORP, CHICAGO:

“The market is really responding to the concept that the Fed still has the path they want to follow and that path still involves multiple interest rate increases next year.

“There’s a huge amount of money that’s trading these events, so you’re getting extraordinary volatility on what I don’t think was extraordinarily volatile news.

“It would have been maybe better if (Powell) just plain out said that going forward, our policy is going to be completely data dependent.”

“I don’t think what he said is that far from that. This is a trading game, not investing right now. It’s unfortunate that we’re in a really volatile market.”

MICHAEL O’ROURKE, CHIEF MARKET STRATEGIST, JONESTRADING, GREENWICH, CONNECTICUT

“It was the balance sheet. First, he started talking about it being on autopilot which I just think was a poor choice of words but the market took it that way. And I guess when you are talking about data dependency and all your monetary policy tools, you gear that you are flexible on anything. Of course he is, he can always change that whenever he wants.”

“There was a little too much spin coming into today about dovish tightening, which is one of the worst terms I have ever heard used. Because the Fed has been tightening all along, especially when you have this quantitative tightening, this balance sheet normalization going on at $50 billion a month, there is nothing dovish about it.”

FRITZ FOLTS, CHIEF INVESTMENT STRATEGIST, 3EDGE ASSET MANAGEMENT LP, BOSTON

“The balance sheet question did him in…. Maybe they have already committed their policy error. We would be in the camp that they have already raised rates too much.”

“With the lagged effect of monetary policy and the slowdown that we’re seeing maybe they’ve gone one too far already.”

“Earnings for companies have been at ridiculously high levels and that, to us, just can’t continue, especially in the face of monetary tightening and they’ve had so long a period of share buybacks and these corporations are holding record debt now.”

“In some respect the Fed in this meeting actually established some credibility. They did it. They raised rates, and they didn’t bend. They certainly didn’t bend to Trump – that’s for sure. And they didn’t bend to the market and so if they need to do something in the future I think that they did help their credibility in this meeting.”

GREG MCBRIDE, CHIEF FINANCIAL ANALYST, BANKRATE.COM (EMAIL)

“Interest rate hikes produce turbulence for the stock market but do result in better returns for savers and investors looking for a safe haven. For the first time in a decade, the top-yielding online savings accounts and money markets are ahead of inflation – and this rate hike will help keep it that way.”

TIM GHRISKEY, CHIEF INVESTMENT STRATEGIST, INVERNESS COUNSEL, NEW YORK

“There’s some disappointment that they weren’t more dovish. They basically matched what had become the street consensus, with the December hike and two more hikes in 2019. On the positive side, it says that they don’t see anything that’s derailing the economy. Yes, estimates are coming down some, probably related to some of the tariff issues, but they don’t see anything that’s going to cause a major economic downturn on the immediate horizon. But the market was hoping for a more dovish outlook. Some definite disappointment from investors.

QUINCY KROSBY, CHIEF MARKET STRATEGIST, PRUDENTIAL FINANCIAL, NEWARK, NEW JERSEY (=2)

“The unwinding of the balance sheet is contributing to (financial) tightening. Some believe that that’s tightening conditions even more than rate hikes do. But Powell is steadfast in his commentary today that he doesn’t see any tightening that stems from the unwinding of the balance sheet….The market message is we are seeing tighter financial conditions and a weaker path for growth.”

MEGAN GREENE, GLOBAL CHIEF ECONOMIST, MANULIFE ASSET MANAGEMENT, BOSTON

“It was going to be really hard for him to not spook the market after it overreacted last time he talked. Rate hike expectations had fallen to one for 2019 which wasn’t realistic.”

“The thing he said that really moved the market was that he made it clear the Fed doesn’t want to adjust its balance sheet roll off and that interest rates would be the primary tool for monetary policy.”

“Investors were hoping we might get some reprieve from tightening but it looks like that balance sheet is not in play.”

“I totally expected that. The Fed hasn’t been particularly secretive about the fact that rates were their primary tool. It was just that market expectations were out of whack. He had a really hard job threading the needle today.”

SCOTT MINERD, GLOBAL CHIEF INVESTMENT OFFICER, GUGGENHEIM PARTNERS, LOS ANGELES (EMAILED)

“Statement not as dovish as hoped for by market participants. The flattening yield curve is telling us that market perceives that policy is more restrictive than required given the economic backdrop. Powell’s emphasis on flexibility will lend support to risk assets.”

“Sudden decline in stocks and bond yields on Powell’s comment that the pace of balance sheet reduction is on a preset course and adjusting the pace of balance sheet reduction is not an option at this time disappointed the market. Market may be signaling a desire to slow down the pace of balance sheet normalization.“

PAUL NOLTE, PORTFOLIO MANAGER, KINGSVIEW ASSET MANAGEMENT, CHICAGO

“It looks as though they’re a little bit more hawkish than dovish because they still have two more rate hikes for next year. It looks to me as though they are anticipating continued strength in the economy. Hence the two more rate hikes, based on the dot plot. It’s well up from basically one based on market expectations.”

“We’re going to see slower economic growth. However, that doesn’t quite square with some of the more immediate comments about the economy. That’s why we’re seeing a decline in the equity markets off the highs right before the meeting. We’re seeing yields fall further, which is actually kind of a surprise but they’re hanging their hats on that slower long term growth.”

“It goes back to the two rate hikes implied by the dot plot. That’s where equity markets are turning right now because they look at that…as an equity investor I’m concerned about slowing economic data, I’m concerned about tariffs and the implications for earnings, etcetera…but the Fed doesn’t seem to be worried about the same things that I’m worried about.”

ERIC DONOVAN, MANAGING DIRECTOR, OTC FX AND INTEREST RATES, INTL FCSTONE, NEW YORK

“Right now, the market is pricing in zero hikes for next year. The 10-year Treasury rate is essentially unchanged. All the Fed has done is say, ‘well, maybe instead of three we’ll do two.’ They’re not saying one to two. The forecast is still for two hikes next year.

“I thought it was absurd that anybody thought they might not cut today, based on the information that’s been coming in. There’s a lot of sensationalism going on in the market and people are completely losing site of what the Fed’s mandate is.

“If there’s one metric in the market that gives me a little bit of pause in terms of trying to anticipate what the Fed will do next year, that’s the collapse in crude oil prices.

“Front-end crude has dropped below $50 a barrel, that more anything that’s happening in stocks or anything else gives me a little bit of pause because if crude keep slipping that could weigh on prices in general, and rest assured, if we do fall below the 2 percent inflation target, that is the one and only thing that is going to cause the Fed to stop hiking rates.”

J.J. KINAHAN, CHIEF MARKET STRATEGIST, TD AMERITRADE, CHICAGO

“I don’t know if the market necessarily knows what to make of it. I think the market was damned if they wouldn’t and damned if they would, so to speak.”

“We had a lot of people asking the Fed not to raise rates this week, which would have led to a bigger disaster.”

They lowered their path for the next year, which would imply just two rate hikes, that puts the target range between 2.75 - 3, so I think that is pretty dovish, I don’t know how much more dovish they could’ve been.”

“I think it’s still going to be difficult to rally significantly, because over-arching we have the tariff situation and as long that exists it is really difficult for people to really get super excited about stocks right now because there is a big unknown in the markets.”

“Even though they raised rates, the markets are still pushing rates down, from what is going on in the 10-year and 30-year futures .

“It’s still all about tariffs, we’ll see what happens tariff-wise, that’s still the primary story.

QUINCY KROSBY, CHIEF MARKET STRATEGIST, PRUDENTIAL FINANCIAL, NEWARK, NEW JERSEY

“Clearly this is a Fed that’s going to be forced to be data dependent. The GDP forecast for next year is solid. It’s not stellar. If it begins to wane the Fed is going to have to be data dependent.”

“What the market needs right now is a spate of unequivocally strong data. That’s what it needs to absorb a couple of rate hikes next year. There’s a question if the market gets that.”

“There’s an adage that price action comes before the data … The question becomes whether or not the Fed and the market meet somewhere in the middle where they’re seeing the same trajectory.”

“The market has been oversold so you’d have expected to see a bounce but there are those who were waiting for the bounce to sell into it to lock in gains.”

KRISTINA HOOPER, GLOBAL MARKET STRATEGIST, INVESCO LTD, NEW YORK

“The Fed did what the market had hoped for and expected, which is to raise rates but to suggest a more dovish stance in 2019.”

“The Fed couldn’t get too dovish without sounding alarmist so this was a delicate balancing act, but I believe they struck the right balance because there’s always room to make alterations going forward… This is a very good place for the Fed to leave 2018.”

“I’m not as concerned as, I think, markets have become in recent days. The economic growth picture remains solid even though its decelerated, and that’s true globally it’s also true in the U.S., although it’s something of a standout compared to a lot of other countries’ economies. This is an environment where certainly risks have increased, but my base case remains modest growth.”

DAVID JOY, CHIEF MARKET STRATEGIST, AMERIPRISE FINANCIAL, BOSTON

“It’s a disappointment to investors who were hoping it was going to be more dovish than it turned out to be. A lot of people were thinking they needed to change the language. The language last time said the committee expects further gradual increases are consistent with conditions. This time they said some further increases will be needed. That is not as dovish as some people were hoping - maybe adjustments going forward left the door open left the door open to an increase or maybe even no change or a cut at some point. That is not what they did. It looks like now they are saying maybe two hikes next year instead of three, that is a little bit of moderation but it is not nearly what the market was hoping for.

The economic data has been pretty good but there have been pockets of weakness in some of the interest rate sensitive parts like housing and automobiles. So the market in a way had talked itself into presuming the Fed would be as dovish as they were hoping for. That is not consistent with what the Fed has been saying. But retail sales were strong, the unemployment rate is still low, job creation is still strong. The Fed is saying maybe not 2.5 percent GDP growth next year but 2.3 percent, that is above trend. So the Fed is still convinced the market remains pretty strong and there is at least a threat of higher inflation resulting from the strong jobs market. And investors put too much weight on the price action over the last week or two. So this is clearly going to be a disappointment.”

JUAN PEREZ, SENIOR CURRENCY TRADER, TEMPUS, INC, WASHINGTON

“The U.S. Dollar will likely show resilience to losing some of its value since the hike does represent a higher return for investors. However, the initial take is that Powell and the committee may have had second thoughts about the originally thought pace of hikes for next year.

“The economy seems to have a bad aura around it. Everybody seems to be somewhat in agreement, and the sentiment has manifested itself in the form of doubts about increasing borrowing costs too quickly.

“We predict the dollar will swing as it closes the year, but will be on a downward trend if indeed the Fed admits more caution and monitoring of lagging indicators is needed before further tightening.”

JAMIE COX, MANAGING PARTNER, HARRIS FINANCIAL GROUP, RICHMOND, VIRGINIA

“I think that markets were looking for more in terms of the pause. But I think the Fed gave it to us. By lowering the outlook to two hikes versus three, this is the way the Fed steps itself down. It’s not as dovish as expected but I do believe the Fed will ultimately back off even further as we move into the new year.”

“If you were to look historically, the market’s initial knee jerk reaction tends to be the wrong one.”