Instant View: Fed Holds Rates Steady, Offers No New Guidance on Balance Sheet
NEW YORK (Reuters) – The Federal Reserve held interest rates steady on Wednesday at its first policy meeting of the year, with officials pointing to continued moderate U.S. economic growth and a “strong” job market.
The Fed’s policy-setting committee announced its unanimous decision to maintain the key overnight lending rate in a range of between 1.50% and 1.75%.
The Fed’s statement was little changed from the one issued after its December meeting, saying that the current federal funds rate was “appropriate to support sustained expansion of economic activity,” including ongoing job growth and a rise in inflation to the central bank’s 2% target.
STOCKS: U.S. stocks were steady, with the S&P 500 last 0.4% firmer. BONDS: The 10-year U.S. Treasury note yield was steady at 1.6131 and the 2-year yield was last at 1.4446.
FOREX: The dollar index was last up 0.09%.
KRISTINA HOOPER, CHIEF GLOBAL MARKET STRATEGIST, INVESCO, NEW YORK
“There wasn’t much that changed from the last statement. One difference was the characterization of household spending, it went from strong to moderate. We want to follow that closely because the consumer really is the engine driving the U.S. economy.
“The much bigger takeaway from this is the continuing repo operations through at least April of 2020. That is really helping to expand the Fed’s balance sheet. While it is not their intention it is creating something akin to the environment we saw during QE. By extending it at least to April, they come one step closer to having a standing repo facility, which I don’t think is a bad thing. But we have to recognise that it could create a bit of euphoria in the markets.”
MICHAEL PURVES, FOUNDER AND CEO, TALLBACKEN CAPITAL ADVISORS, NEW YORK
“We’re dealing with a very static Fed. The statement was pretty similar to the December statement.”
“This is what the markets and certainly I (were) expecting, to be reinforcement of a no-hike, no-cut policy. When pressed, it seems like they’re going to err on the side of the doves rather than the hawks.”
GREGORY FARANELLO, HEAD OF U.S. RATES, AMERIVET SECURITIES, NEW YORK:
“The Fed statement is pretty much as expected and largely a non-event. We’re still going to see balance sheet expansion from until April, which is what we expected. Without question, that extra liquidity is having an impact on risk assets and financial conditions if you just look at the correlation between equities and the Fed’s balance sheet.”
ARTHUR BASS, MANAGING DIRECTOR AT WEDBUSH SECURITIES IN NEW YORK:
“What the Fed would like to see is the economy start picking up on an international basis, not just in the US, and then gradually easy off. I think their biggest fear is that they can’t do that before the next recession.”
RICK MECKLER, PARTNER, CHERRY LANE INVESTMENTS, NEW VERNON, NEW JERSEY:
“It couldn’t be more consistent with what they’ve said before, and of course they’re on hold here. You’ve got a lot of countervailing economic issues for them to face and the possible impact of the virus slowing some global demand… But, on the other hand, demand remains robust with consumers… There’s nothing that indicates inflation is about to take off.”
ELLEN HAZEN, PORTFOLIO MANAGER AT F.L.PUTNAM INVESTMENT MANAGEMENT IN WELLESLEY, MASSACHUSETTS:
“The key reaction is going to be in the Q&A at the press conference when they talk about what they are going to do with the balance sheet. It is an open question whether or not the change in the Fed’s balance sheet has directly driven the increase in the S&P 500 since last fall. Certainly, if you overlay those two charts on one another they look very similar.
“The key question is how much the different Fed members care about managing the S&P 500 because there are certainly those people out there who will say that if you start to shrink the balance sheet you will cause the market to decline and particularly whether the administration believes that.
“One warning sign, or one negative sign, out of this statement is the change about household spending that it has declined from strong to moderate. I was a little surprised to see that, frankly, so it will be interesting to see what data they have been looking at to draw that conclusion.”
JOSEPH SROKA, CHIEF INVESTMENT OFFICER AT NOVAPOINT IN ATLANTA:
“I didn’t notice anything different. There was no expectation that rates were going to change, especially going back to the December minutes which indicated that the Fed had no intention of changing monetary policy unless there was a significant change in the trajectory of the U.S. economy.”
CANDICE BANGSUND, PORTFOLIO MANAGER, GLOBAL ASSET ALLOCATION, FIERA CAPITAL, MONTREAL.
“There were no surprises in the statement. We continue to believe that the Federal Reserve will remain comfortably on the sidelines through 2020. The global headwinds that were primarily responsible for the Fed’s dovish pivot in 2019 have now largely subsided, with trade tensions de-escalating and recent developments in the UK reducing the likelihood of a disorderly Brexit.
“There are some hopeful signs that the factory-driven slump in global growth may finally be finding a floor, though coronavirus fears could temporarily derail this narrative in the near-term. Policymakers have emphasized that they will tolerate higher, above-target inflation in order to compensate for years of missing the mark. Taken together, this suggests that the threshold for a move in either direction remains high at this time.”
PETER NG, SENIOR FX TRADER AT SILICON VALLEY BANK, SANTA CLARA, CALIFORNIA
“Expectations were low going into the FOMC. There weren’t many changes, but there was one notable downgrade on the consumer sector in the wording. Household spending rising at a ‘strong pace’ to a ‘moderate pace’. That was notable.”
“They did raise the interest on excess reserves by 5 basis points. The markets appeared divided on that, but they did come through. It seems like concerns over tightness in short term money markets have subsided for the time being.”
“They will continue to extend repo operations through the tax period of April, which is a good thing, I believe.”
CHRIS GAFFNEY, PRESIDENT OF WORLD MARKETS, TIAA BANK, ST. LOUIS
“The Fed’s going to remain on hold for the foreseeable future, as long as GDP growth and inflation doesn’t move outside of the bands that we’re stuck in, anchored right around 2%. The Fed is not going to get in the way of the markets. They will continue to fuel the equity market rally with lower interest rates, and as we get further into the year, it’s going to become harder and harder for them to make any interest rate moves because then it will be seen as political.”
“For markets today, it should be positive. The Fed continues to support the markets with lower interest rates.”
KATHY JONES, CHIEF FIXED INCOME STRATEGIST, SCHWAB CENTER FOR FINANCIAL RESEARCH, NEW YORK
“This is about as neutral a statement as you could write.
“It might surprise a few people that they’re only talking about extending the repo operations through April. It makes sense because they have to get through tax day. But maybe that was a subtle hint that – don’t expect this to last forever.
“It will be interesting to see if there’s any insight in terms of how (the coronavirus) is affecting their thinking. I’m guessing we’re not going to know too much because they don’t know too much about it yet, so what could they really say with any conviction.”
PETER CARDILLO, CHIEF MARKET ECONOMIST AT SPARTAN CAPITAL SECURITIES IN NEW YORK:
“The one thing I was surprised by was that there was no specific mention of the coronavirus which could be a problem for the global economy. And there was no dissent. The vote was unanimous. That implies that the Fed is going to stay on hold here. Of course they always leave the door open.”
“Early in the day when the market was strong we turned around on the news that the number of virus victims in China had jumped. Maybe besides the fact there was no change in monetary policy, the fact the Fed didn’t go out of its way to hint at global economic weakness due to the virus could be a relief to the market.”