NEW YORK (Reuters) -The Federal Reserve held interest rates steady on Wednesday and signaled in new economic projections that the historic tightening of U.S. monetary policy engineered over the last two years is at an end and lower borrowing costs are coming in 2024.
MARKET REACTION:
STOCKS: The S&P 500 extended gains and was recently up 1.01%
BONDS: The U.S. Treasury 10-year yield tumbled and recently stood at around 4.041%, after hitting its lowest level since August at 4.007%. The 2-year yield fell and was recently at 4.464%, after touching its lowest level since early-June at 4.431%.
FOREX: The dollar index was down 0.75%
COMMENTS:
ERIC WINOGRAD, SENIOR ECONOMIST, ALLIANCEBERNSTEIN, NEW YORK CITY:
“While the committee retains the option of additional hikes, the message from the Fed is pretty clear: the hiking cycle is over unless there is a significant surprise, and the risks of a cut are greater than those of a hike in the next several months.”
“While I think the magnitude of the market response is exaggerated, the direction is correct: the Fed for the first time this cycle opened the door to rate cuts across a reasonable forecast horizon, and that is significant.”
BLAIR SHWEDO, HEAD OF US SALES AND TRADING, US BANK, CHARLOTTE, NORTH CAROLINA:
“The FOMC statement and forecasts were quite dovish and appear to be what the market has eagerly been pricing in over the past few weeks. The Fed’s projections affirm the market’s expectation for rate cuts in 2024.”
“This should be an extremely welcome environment for corporate issuance as the combination of treasury strength and credit spread tightening have led to north of 100 basis points worth of yield reduction in investment grade since early November.”
ELLEN HAZEN, CHIEF MARKET STRATEGIST, F.L.PUTNAM INVESTMENT MANAGEMENT, WELLESLEY, MASSACHUSETTS
“The Fed was unequivocally dovish. They added that word ‘any’ in the third paragraph suggesting that maybe there will not be any firming next year, whereas before they had communicated that there might be firming next year. Most importantly if you look at their fed funds rate projections, they took them down by 50 (basis points) next year. So they were looking for two cuts for next year, now they are looking for four cuts. They are attributing this to growth of economic activity slowing and that’s what justifies this more dovish stance. I would say that they are basically communicating an immaculate disinflation. I do worry that as good as the economy looks right now, I do hope they’re not taking a victory lap prematurely.”
“They’re saying ‘well we’re going to cut rates four times next year instead of two times,’ which they were saying before. But by the way, we’re not changing our forecast for the unemployment rate for any of the next three years – really? You’re going to find justification for cutting rates without unemployment rising? I mean, maybe right? Maybe but wow, that’s a narrow path that the economy has to follow for their communication today to be warranted.”
GINA BOLVIN, PRESIDENT, BOLVIN WEALTH MANAGEMENT GROUP, BOSTON, MASSACHUSETTS
“The Fed has given the market an early holiday gift today when, finally, for the first time, they have commented positively about inflation. I’d say we’ve seen a pivot as they acknowledged inflation is falling. It appears that the Fed is moving in the markets direction, rather than the market moving towards the Fed. The Santa Claus rally may continue.”
JEFFREY ROACH, CHIEF ECONOMIST, LPL FINANCIAL, CHARLOTTE, NC
“The big adjustment in the statement is the subtlety of the word ‘any’, meaning not much change in the actual statement other than what we know already. The economy is slowing and Inflation is easing, so the statement alluded to that. I think we’ve seen peak rates. It’s reasonable to assume that the Fed’s next move is a cut, probably not until middle of next year. But after three pauses, they’ve moving from a temporary pause to where we are at: peak rates.
“The 2024 growth that was revised downward is consistent with the market view on rates getting lower next year. It was pretty interesting to see how the two-year Treasury yields dropped a couple of basis points. The extent of rates cuts in 2024 really depends on the labor market and the overall general economic activity. But at this point, rates are restrictive with inflation continuing to ease.”
MICHAEL BROWN, MARKET ANALYST, TRADERX, LONDON
“No surprise in terms of rates with the Fed funds rate remaining unchanged, though a marginally more dovish than expected dot plot doesn’t exactly provide the pushback on market pricing and looser financial conditions that most had been expecting.”
“The economic assessment remains broadly unchanged with incoming data having done little to materially alter the outlook. Ultimately, while markets have undergone a knee-jerk dovish repricing, this is unlikely to be a game-changer in terms of the outlook, with the debate for 2024 still likely focusing on the reasoning for a cut (soft landing or growth slump?) over the magnitude of such a move.”
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST, CORPAY, TORONTO
“By raising the bar to further tightening and telegraphing at least three rate cuts in 2024, the Fed turned decisively dovish this afternoon, waving a red flag in front of market bulls hoping for an easing in policy.”
“Perhaps more importantly, officials appear convinced a “soft landing” is in the offing, with inflation subsiding, growth remaining strongly positive, and unemployment remaining essentially changed through the course of 2024. The conditions are in place for a melt-up in financial markets, and a further easing in credit conditions across the economy.”
TOM MARTIN, SENIOR PORTFOLIO MANAGER, GLOBALT INVESTMENTS, ATLANTA
“The statement is telling us that the Fed is seeing what the markets have already started to discount, that you’re going to have inflation back to normal without a recession.”
“We kind of hoped it was going to be this, but we didn’t really think it was. I think there was a lot more tacit expectation that at the least the statement and the dot plot weren’t going to be quite this clear.”
BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN
“The FOMC is becoming a motley crew. The divide isn’t so much about whether to cut in 2024, but rather how much and when. The Powell Pause may only last until the May meeting. The critical question is whether the Fed will be cutting because it can or because it has to. If the Fed is only tracking inflation lower, that’s bullish, but the more likely scenario is that they cut because growth stalls and they have to cut.”
(Compiled by the Global Finance & Markets Breaking News team)
