New projections saw a majority of 11 Fed officials pencil in at least two quarter-point interest rate increases for 2023, even as officials in a statement after their two-day policy meeting pledged to keep policy supportive for now to encourage an ongoing jobs recovery.
The Fed also made technical adjustments to prevent its benchmark interest rates from falling too low. It raised the interest rate it pays banks on reserves – the IOER – held at the U.S. central bank by five basis points, and also lifted to 0.05% from zero the rate it pays on overnight reverse repurchase agreements, used to set a floor on short-term interest rates.
In a question and answer period after the statement, Chairman Jerome Powell said the Fed will provide advanced notice before changing asset purchases and that considering tapering of these purchases at coming meetings would be appropriate, if progress allows.
STOCKS: The S&P 500 extended losses to -0.83%%
BONDS: The 10-year U.S. Treasury note yield jumped to 1.5720% and the 2-year yield rose to 0.1991%
FOREX: The dollar index turned higher. It was last up 0.72%
PETER TUZ, PRESIDENT, CHASE INVESTMENT COUNSEL, CHARLOTTESVILLE, VIRGINIA
“I’m not too surprised by the statement or the reaction. You would have had to have your head pretty buried in the sand not to pick up on inflation rising in many parts of the U.S. economy. So the Fed acknowledged that. The market’s reaction to the Fed acknowledging rising inflation is also not a surprise because now people are wondering if and when are you going to do something.”
STEVEN RICCHIUTO, U.S. CHIEF ECONOMIST, MIZUHO SECURITIES USA LLC, NEW YORK
“The policy statement is verbatim from what we had last time, essentially. And that is going to drive the post-meeting press conference, which is going to drive home the point that this Fed is going to stay the course, which is not what the market wanted. A lot of people wanted the Fed to say something more aggressive and the Fed took the least aggressive tact that they could. That’s the right decision for them to make.
“If the Fed had told you that they’re going to be aggressive and start tapering, yields would have continued to move down. The fact that they’re not doing that means that yields, people were a little bit too aggressive in terms of what was going to happen.
GENNADIY GOLDBERG, INTEREST RATE STRATEGIST, TD SECURITIES, NEW YORK
“The market reacted quite hawkishly and I think that was largely to the 2023 dot actually moving up even more than we had anticipated. We had expected it to move to one hike, it actually moved to two, so certainly a bit more optimism there. The statement was a little bit more upbeat but I would say there weren’t that many changes there that warranted this kind of reaction. So really the crux of the reaction really came down to the dot.”
“On the front-end it does look like the Fed just decided to move preemptively. They effectively raised IOER and RRP and that should help support the money market complex and just prevent any further flirtation with negative rates, at least for now. I think everyone was basically anticipating this hike at some point, the move today was basically done just to be preemptive.”
JASON WARE, CHIEF INVESTMENT OFFICER & CHIEF ECONOMIST, ALBION FINANCIAL GROUP, SALT LAKE CITY
“I think the market is taking it as a bit more hawkish in the initial reaction. In the coming days we will see what investors truly think. The reason traders are a bit skittish is that in some ways the results of the meeting, at least so far in the statement and the pulling forward of the timeline of the first rate hike, just that change is enough to make those that are ultra-short-term-focused re-position. But for longer-term investors, it is still extremely loose financial conditions and ultra-accommodative for equity investors.
“Another element is they increased their headline inflation expectations which demonstrates they are paying attention to the latest CPI reports. They brought that up. That’s a good thing. That helps underscore and solidify the Fed’s credibility.”
“I think there were an increasing number of market participants that expected a more robust conversation about when tapering might begin. Our expectation is we will probably see the stage being set for tapering in August at Jackson Hole.”
STEPHEN MASSOCCA, SENIOR VICE PRESIDENT, WEDBUSH SECURITIES, SAN FRANCISCO
“Basically they are living off this theory that all these inflationary numbers are the result of a disorganized economy exiting Covid and that once the economy reorganizes price pressure will return and inflation will vanish, that is the argument they are making. I actually kind of think it is a good one. Before they react I think waiting for a few months is prudent and I think the market understands that.
“The one guy remaining in power, Powell, knows what he is doing. And if you scream PPI, look at that number, it is just because the economy is so disorganized now coming out of Covid that once it organizes that will be a mirage that goes away. It really does make a lot of sense. If it doesn’t happen that is going to be a real problem for the market. But right now that argument makes sense and everybody is buying it.”
GUY LEBAS, CHIEF FIXED INCOME STRATEGIST, JANNEY MONTGOMERY SCOTT, PHILADELPHIA
“The IOER hike is really about relieving some of the strains in the front-end of the curve related to a tsunami of cash in the financial system. Banks are overreserved, money market funds are finding it hard to get positive yield anywhere and so it addresses some of those problems. But it will also have the effect of pulling yields out the curve a little bit higher, probably out to about three years, because the relative value of a two-year or three year note is in part dependent on what a bank can get in overnight rates, which is now somewhat higher.”
“I don’t think that there’s a ton of information at this stage conveyed in the dots because you’re measuring a median forecast at a time when economic variability is massive. It’s also a conditional forecast and I think the conditions on which the forecast is based are at best volatile and somewhat unlikely.”
KARL SCHAMOTTA, DIRECTOR OF GLOBAL PRODUCT AND MARKET STRATEGY, CAMBRIDGE GLOBAL PAYMENTS, TORONTO
“We may not be seeing a taper tantrum but we are seeing a hissy fit on currency markets. The interesting thing is that the Fed has gone beyond simply acknowledging that inflation is rising and that the U.S. economy has a lot of momentum, and it has essentially shifted to a much more hawkish stance in this set of projections.”
JACK ABLIN, CHIEF INVESTMENT OFFICER, CRESSET WEALTH ADVISORS
“I think this is pretty close to what the market wanted. The market wanted the Fed to tell investors that there is nothing to see here, keep moving, nothing going on in the economy or inflation, and we’re just going to stay aggressively easy.”
“The Fed is not in complete denial, the way the market would have liked. They do recognize that they will have to respond sometime in the future. But I will call that a tilt – not a change in direction. The Fed is still maintaining its head-in-the-sand policy.”
RYAN DETRICK, SENIOR MARKET STRATEGIST, LPL FINANCIAL, CHARLOTTE, NORTH CAROLINA
“The market’s a little lower but you see that on Fed days.
“There was a big jump in (the Fed’s) inflation expectations, a point above March projections, and with the likelihood of first rate hike now in 2023, there was a knee jerk reaction and the market is trying to digest it.
“But the market was expecting this. The market is having typical Fed day volatility.
“It’s like you get all worked up and excited when the Fed has an announcement and the market sleeps on it overnight and go the other way the very next day.
“They upped the GDP forecast, we’ve got a stronger economy and stronger inflation. Those shouldn’t be surprises to anyone.”
“The action in the bond market is pretty calm. The stock market is having typically volatile Fed day shake-out but the bond market seems to be taking it in stride, and that’s a key takeaway.
“There’s no sign of tapering, but we’ll see with the Q&A.”
FRANCES DONALD, GLOBAL CHIEF ECONOMIST, MANULIFE INVESTMENT MANAGEMENT, TORONTO
“The dot plot is now showing two rate hikes by 2023. That’s enough of a hawkish surprise for the bond market and its getting all of the attention.”
“What’s interesting here is that the Federal Reserve has increased its estimate of when the first rate hikes will come but not materially changed its 2022 and 2023 projections for growth and inflation. What that tells us is that while the outlook hasn’t dramatically changed it seems that the Fed’s confidence in returning to a normal environment has.”
“There has not been a material change of tone. This statement has only a few adjustments.
“The market is reacting to a few strands of information in the dot plot. Now it will be Powell’s time to try to dissuade the market from reading too much into the dot plot.”
TOM MARTIN, SENIOR PORTFOLIO MANAGER, GLOBALT INVESTMENTS, ATLANTA
“The market wants to see the Fed communicate that it’s going to provide the accommodation that the country will need while being on the lookout for inflation, and to me, what you got with this announcement is what the market wanted.
“On average, the market does want the Fed to be measured, which they absolutely were with this release.
“I don’t see that the movements in the S&P and Nasdaq mean much.”
For a look at all of today’s economic events, check out our economic calendar.
(Compiled by the U.S. Finance & Markets Breaking News team)