NEW YORK (Reuters) – The U.S. Federal Reserve held interest rates steady on Thursday and said ongoing strong job gains and household spending had kept the economy on track.
“The labor market has continued to strengthen and … economic activity has been rising at a strong rate,” the Fed said in its latest policy statement, leaving intact its plans to continue raising rates gradually.
The statement reflected little change in the U.S. central bank’s outlook for the economy since the last policy meeting in September, with inflation remaining near its 2 percent target, unemployment falling and risks to the economic outlook appearing to be “roughly balanced.”
STOCKS: The S&P 500 extended losses and was last down 0.6 percent. The Dow was firm then turned down 0.3 percent. BONDS: The 10-year U.S. Treasury note yield rose to 3.2355 percent and the 2-year yield rose to 2.9691 percent. The five-year yield rose to its highest in a decade.
FOREX: The dollar index was up 0.58 percent.
GENE TANNUZZO, DEPUTY GLOBAL HEAD OF FIXED INCOME, COLUMBIA THREADNEEDLE, MINNEAPOLIS
“They did not take the opportunity to say financial conditions tightened. The omission of that is maybe slightly important. This smells like a situation where I think they say ‘Look we want to hike in December. We want to stick as close as the last statement.” There are those people are unsatisfied by this statement because they were looking for a more dovish tone after last month’s market volatility. That’s why we see short-term yields ticked up and stocks down here. They are still on track. There are still open questions. Are we close to a neutral level on rates? What is going to happen to the ultimate size of the Fed balance sheet? There is nothing in the broad data that would shake them from the current policy path.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK:
“It was in line with what I was looking for, and it was what the market was looking for as well.
“They cited consumer spending as strong, a tight labor market, and those two factors just simply mean that rates need to move higher to at least get to a normalized level so that the economy doesn’t overheat.
“You can see the reaction in the (stock) market is basically nil, just mixed today, coming off of a strong rally yesterday. I think the message form the Fed is this: rates are going up for the right reasons, not the wrong reasons, so that should not negatively affect equities.”
TIM GHRISKEY, CHIEF INVESTMENT STRATEGIST AT INVERNESS COUNSEL IN NEW YORK:
“There were a couple changes from the prior statement, nothing huge. Business fixed investment, they admitted that its growth rate has moderated. We see that in the data. That’s really the only change of any significance. I don’t think anything in here says the Fed has to tighten in December, but they remain on pace to tighten in December. They’ve telegraphed that very clearly. If you look historically while they’re at the core PCE rate, which they admit is their medium-term objective, historically they’ve overshot that rate on purpose an average of 0.9 percent. So we would expect the Fed not only to hike in December but also two to three times in 2019. And everything being equal, they’ve achieved their objective.
“The stock market is always choppy going into and especially right after a Fed announcement, regardless of what was said. Because of that business fixed investment line, it showed a little bit of caution from the Fed about becoming too aggressive and the market greets that favorably.”
RICK RIEDER, CHIEF INVESTMENT OFFICER OF GLOBAL FIXED INCOME, BLACKROCK INC, NEW YORK, NY
“The one interesting change in today’s statement was a reference to some moderation in business fixed investment. The Fed is clearly beginning to recognize a dynamic that has been working through the economy, in the form of tangible tightening of financial conditions.”
QUINCY KROSBY, CHIEF MARKET STRATEGIST, PRUDENTIAL FINANCIAL, NEWARK, NEW JERSEY
“The Fed did not mention recent market action. However, they did point to slowing in business investment. The expectation is that business investment would pick up: one, because of the stronger economy, but primarily because of the tax cuts for companies coupled with the depreciation given to companies for business spending. They didn’t say this, but many companies are holding off to see what develops with tariff issues with China. The fact is that with more business spending, you have more help with the underlying economy. A slowdown in business spending can slow the underpinning of the stock market.”
“The question for the market is: is the Fed data-dependent or is it maintaining a rigid schedule for rate hikes in 2019? What would cause the Fed to pause? It’s clear from this statement today that they’re looking at anything that could potentially slow the economy. Corporate spending is important, because business increasing their amount of investment helps push GDP up.”
JASON WARE, CHIEF INVESTMENT OFFICER, ALBION FINANCIAL, UTAH
“We had a bit of volatility around the report but it seems to have settled. I don’t think there was anything in the way of surprises. The only change I think that is noteworthy is that growth of business fixed investment moderated, that’s perhaps got some attention, but it’s hard to know what that means. It could be a whole host of factors. But what does that mean for Fed policy? I don’t think its hawkish, its either dovish or neutral.”
YOUSEF ABBASI, GLOBAL MARKET STRATEGIST, NTL FCSTONE, NEW YORK
“There is very little that is new with this statement. The fact that they are highlighting business investment had moderated is certainly something to consider. The other side, obviously, household spending continues to grow strongly. It shows you that the Fed understands that we continue to go down the path of an economy that is healthy and doing very well.
“We have a strong economy and business investment is one thing we hope could turn around if we could get a trade deal done.
“For today, it’s steady as we go. Again, expectations should have us pretty well grounded here. We knew what was coming, and the Fed delivered a benign statement. We should meander in the day’s trading.”
BRAD MCMILLAN, CHIEF INVESTMENT OFFICER, COMMONWEALTH FINANCIAL NETWORK, WALTHAM, MASS
“I read the statement and I saw the word strong three times. The only real whisper of concern was that business investment had moderated. “
“What the statement overall signals is that they’re still on track to raise rates. December is in the plan and they don’t see any reason to slow or stop the rate increases.”
“This is very much in line with what the market expected. I see the market today walking back a little from the strong gains yesterday. There’s no real news in the statement.”
JAMIE COX, MANAGING PARTNER, HARRIS FINANCIAL GROUP, RICHMOND, VIRGINIA
“Other than highlighting that business fixed investment has moderated some from earlier in the year, that’s the only part of the statement that has really changed.”
“The Fed has recognized that there is one part of the economy that is slowing a little bit, but it is not deterring them from their gradual increase language. Not yet anyway. We’ll see if that materializes in December when the expected rate increase was to happen.”
“There is really nothing to point to what the market had hoped, that there would be a more dovish stance. So I think this is more of what we call a hawkish hold.”
“Markets have been pushing the Fed, I think, to reconsider its path of rate increases. In October, we had this really large market decline and some had posited that it would have an influence on the Fed’s decision to increase rates in December. I never thought that, and the Fed rarely ever uses short-term market volatility to dissuade it from its path. So I think that was false hope, and this is sort of steady as she goes.”
TOM SIMONS, MONEY MARKET ECONOMIST, JEFFERIES, NEW YORK:
“There was very little change in the statement, which was probably as expected. The changes that did come through are consistent with the GDP data that was released in late October. The characterizations of employment and inflation are also consistent with the data and also consistent with continued expectations of a rate hike in December. There has been no impact on the Treasury market. Aside from coming in as expected, it’s also along the continuum of policy that has been communicated for a long time now.”
BORIS SCHLOSSBERG, MANAGING DIRECTOR OF FX STRATEGY, BK ASSET MANAGEMENT, NEW YORK
“The Fed has really kept to expectations. The only surprise here is that they weren’t more hawkish. There were a couple words that were more muted – that business investment had ‘moderated’ from its earlier pace. But apart from that they have not signaled any warning signs at all.”
“The dollar had rallied into the statement, so it’s not clear how much more juice it will get with the Fed coming in as expected.”
“There is no change in Fed policy – they’re going to keep raising interest rates by 25 basis points until something changes.”
Americas Economics and Markets Desk; +1-646 223-6300