Fed leaves rates alone, signals confidence in economy

The Federal Reserve kept interest rates unchanged on Wednesday but signaled confidence in the U.S. economic outlook, leaving the door open to a hike in June.The U.S. central bank’s policy-setting committee said the labor market had improved further despite a recent economic slowdown and that it was keeping a close eye on inflation.KEY POINTS:* It added that global economic headwinds remained on its radar, but removed a specific reference from its last policy statement to the risks they posed.* “The committee continues to closely monitor inflation indicators and global economic and financial developments,” the Fed said in a statement following a two-day meeting. COMMENTS:BILL IRVING, PORTFOLIO MANAGER, FIDELITY INVESTMENTS, MERRIMACK, NEW HAMPSHIRE:“The growth data did disappoint in the first quarter so they are nervous about growth. With inflation, they might be a little less nervous. You have a reflation trade going on with the increase in TIPS inflation breakevens since the last FOMC meeting. This latest statement has not laid out a strong position for a June rate hike. It’s a very close call in what they do in June. It’s contingent on the jobs, inflation and wage data, which may or may not confirm their economic outlook. It’s a Catch-22 in their intention to raise rates. The market senses that. That’s why you see the market pricing in only one rate hike a year for the next four years. You want to hold government securities in your portfolio. There are still a lot of risks out there with China and Brexit. If those risks fail to materialize, yields will rise. If they materialize, yields will fall.”MINH TRANG, SENIOR CURRENCY TRADER AT SILICON VALLEY BANK IN SANTA CLARA, CALIFORNIA:“It’s definitely a bit more bullish. The statement tells you a rate hike in June is certainly on the table. All the changes are all toward greater improvement, a bit rosier outlook for the US economy.”STEPHEN CASEY, SENIOR FOREIGN EXCHANGE TRADER AND MARKET ANALYST AT CAMBRIDGE GLOBAL PAYMENTS IN :“At first glance it looked a little bit hawkish, but as expected it’s pretty much a non-event. I think we did see some surprises in that they’re turning their focus back inward on the domestic economy, eliminating most of that language concerning the outside effects, But for me, this really goes to the credibility of the Fed. They’re very wishy-washy at the moment, from meeting to meeting and I’m not surprised that they’ve again reversed course and are now focusing back on those things that they were focusing on towards the end of last year.“At first glance it seemed like the dollar was going to spike across the board and then it looked like it was going to lose some ground, but I think that was just the algorithm trying to figure out exactly what to do with this statement. Right now it’s largely unchanged and I think that will be the central theme for the next few days.”JOHN BAILER, SENIOR PORTFOLIO MANAGER AT THE BOSTON COMPANY ASSET MANAGEMENT IN BOSTON:

“To my view of the statement, it is pretty neutral in terms of what it says. The big takeaway here is they continued to be positive on the domestic economy – consumer sentiment remains high, real incomes have risen at a solid rate – so clearly they are positive on the U.S. and they have taken out some of the risk on the global economy. It makes me believe they are a little less concerned about the global picture and they continue to be positive about the domestic. So it is slightly hawkish in my mind but not enough to get the market worried about it. “I don’t think there is anything that really came out here that would suggest rates are going to stay lower for longer, you can see the two-year is up a little bit on this. One to two rate hikes this year is just fine for the market. What the market got concerned with in December was the Fed was talking about potentially four rate hikes. One to two is just about right, the market can do well in that environment and that is why it is reacting just fine to the statement, which I believe is a little more hawkish.” RANDY FREDERICK, MANAGING DIRECTOR OF TRADING AND DERIVATIVES FOR CHARLES SCHWAB IN AUSTIN, TEXAS:”I think it was pretty benign. There were not a whole lot of differences, as far as I could make out. There were a couple of comments about global economic activity, but other than that it seemed to me like it was pretty much what everybody expected.”I don’t think there were really any surprises in there. The market didn’t do much initially, but now it seems to be creeping higher.”There is no question that the June hike is still on the table. If anything, the trend already was moving towards a greater likelihood for June and this made that even higher.”

DON ELLENBERGER, HEAD OF MULTI-SECTOR STRATEGIES, FEDERATED INVESTORS, PITTSBURGH, PENNSYLVANIA: “The Fed was trying to walk a very fine line. They wanted to leave June open. They are probably not comfortable that the market is pricing in only about 20 percent chance of a June hike. But they don’t want it to be 100 percent either. They don’t want to surprise the market with a rate hike later this year whether it’s June, September or December. They downgraded their growth outlook, acknowledging a weak first quarter. There’s nothing too shocking here. The curve is flattening here, which is what has happened in the past when the Fed was on a tightening path. But this is a Fed that seems to be moving very slowly with raising rates, which might argue for a steeper curve.”STEPHEN SIMONIS SR, INDEPENDENT ANALYST AT FXDD GLOBAL IN JERSEY CITY, NEW JERSEY:“This was not a totally unpredictable event, and I think the dollar will probably begin to position itself looking forward to June.“It’s a slightly hawkish statement because of them removing the external risks…More or less,(the statement) is the same that it was in March, and people generally looked at that as slightly dovish.”TOM PORCELLI, CHIEF US ECONOMIST, RBC CAPITAL MARKETS, :“The focus here is going to be the fact that they’ve removed the reference to global risks, but inserted that they are still closely monitoring them. It definitely leans somewhat hawkish, given the fact that they’ve removed those risks, but in order for the Fed to have kept alive the potential for another hike this year they had to do something like this… I think the initial knee-jerk will be hawkish, but once the dust settles and people realize what they inserted I think it will water down some of the hawkish reaction.”

“Everything else was marking to market, in the face of a soft GDP print tomorrow and slightly weaker consumption data it’s not a surprise that they marked down their growth assessment.”JASON PRIDE, DIRECTOR OF INVESTMENT STRATEGY AT GLENMEDE IN PHILADELPHIA, PENNSYLVANIA:“The Fed will continue tightening, but the market is likely very slow: We expect one, maybe two rate hikes this year. This slower-than-projected speed of the tightening cycle reflects slow long-term economic growth due to demographic and deleveraging forces as well as recent economic sluggishness due to weakness in China and the energy industry. “Tightening will continue, slowly, because employment continues to improve, fulfilling part of their mandate, while the resulting tightness in some labor markets is leading to wage inflation pressures, which affects the other part of their mandate. Markets should be able to absorb such tightening moves, but will see any indications of a pace faster than 1-2 rate hikes as a negative unless such rate hikes are in reaction to unexpectedly stronger economic or inflation data.” BRIAN JACOBSEN, CHIEF PORTFOLIO STRATEGIST, WELLS FARGO FUNDS MANAGEMENT, MENOMONEE FALLS, WISCONSIN: “It was a marginally more optimistic statement than what we saw in March. The global situation is less of an imminent concern, though the Fed is still watching. The Fed didn’t include a ‘balance of risks’ statement, nor did it include premonitory language like it included in October to telegraph a December rate hike. I think they are in ‘wait-and-see’ mode. June may be too early to hike unless we see a decent pickup in the inflation numbers. To me, that seems highly unlikely.”MARKET REACTION:STOCKS: U.S. stock indexes were little changed BONDS: U.S. bond prices fell, boosting yields – brieflyFOREX: The dollar rallied sharply against the euro and yen before giving back those gains(Refiles to add “Sr” to Stephen Simonis name) (Americas Economics and Markets Desk; +1-646 223-6300)


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