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The Federal Reserve kept interest rates steady on Wednesday and in response the stock market did, well, not much, ultimately finished the day down slightly after nose-diving following the conclusion of Chair Yellen’s press conference. The big movers were Treasuries and gold, both of which rallied.
Dow: 17,640.2, -34.7, (-0.2%) S&P 500: 2,071.5, -3.8, (-0.2%) Nasdaq: 4,834.9, -8.6, (-0.2%) WTI crude oil: $47.50, -2.1% 10-year Treasury: 1.58% Gold: $1,296, +0.7%
The Fed did nothing.
On Wednesday the latest monetary policy statement from the Fed kept interest rates pegged at 0.25%-0.50%, as expected. Along with its policy statement the Fed also released projections for inflation, GDP growth, and a forecast for the future of interest rates.
The Fed’s latest “dot plot” showed that all Fed officials expect one more rate hike this year. After that, fortunes diverge for the Fed with one official expecting no more rate hikes while the longer-run expectations for interest rates are now down to around 3% from 4% roughly a year ago.
The most important passages from the Fed’s statement were its acknowledgement that it is still monitoring international developments and that, “most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.”
Last week, Neil Dutta at Renaissance Macro said the inclusion of this final sentence would be an indication that the Fed is too hawkish relative to the economic fundamentals. This, in turn, would be a signal to sell stocks.
But in a note Wednesday, Dutta said the inclusion of the word “most” indicates a dovish shift for the Fed, writing: “This is an important caveat. Inserting the word ‘most’ reflects the fact that not all measures of inflation expectations are little changed. After all, a popular measure just fell to record lows. We suspect the minutes will reveal a bit more consternation around this point.”
Overall, the market reaction to the Fed’s statement was muted.
Stocks didn’t do much. Treasuries were bid, gold was stronger. On balance, not a major event.
No Fed officials dissented.
Following the release of the Fed’s statement, Chair Janet Yellen held a roughly hour-long press conference.
Yellen emphasized, as she has several times now, that every meeting is a “live” meeting (meaning the Fed could elect to raise interest rates at any of its meetings) and said it is not impossible a policy change could happen at the July meeting.
Markets aren’t pricing in any rate hikes through at least February 2017. The chances the Fed cuts rates at future meetings are now up into the 3%-4% range for all upcoming meetings after having fallen to 0% following the release of the minutes from the Fed’s April meeting.
During the press conference Yellen said she was surprised at the market’s reaction to these minutes, which were taken as a very hawkish signal from the Fed. Of course, the idea the Fed was going to raise interest rates went out the window with the soft May jobs report we got on June 3, though confidence the Fed was going to act to raise rates in June or July had already been waning.
Elsewhere in the press conference, widely-followed Fed watcher Tim Duy, an economist at the University of Oregon, noted that Yellen used the phrase “new normal” two times during the press conference.
In economic circles, “new normal” is often a phrase associated with “secular stagnation,” a broad catch-all suggested the economy is experiencing a demand shortfall that will lead to disappointing economic growth for the foreseeable future.
Yellen was also asked about the impending “Brexit” vote in the UK, which will see Britons vote to either stay or leave the European Union, and said this event was a factor in the Fed’s decision to keep interest rates on hold.
Speaking to the strength of the US economy, Yellen acknowledged that momentum seems to have slowed but demurred when asked to give a time frame on how long the Fed would need to see momentum pick back up for before raising interest rates again.
Neil Dutta, Renaissance Macro:
The statement was largely a mark to market affair. The Fed acknowledged the slowing in the labor market but recognized that household spending strengthened. In the second paragraph, the FOMC reiterated its expectation that labor market indicators will strengthen. The language on inflation showed subtle changes in a more dovish direction, in our view.
Ian Shepherdson, Pantheon Macro:
In one line: Convictions crumble, again.
The Fed left rates on hold on a unanimous vote. The dotplot shows a median of two hikes this year, unchanged from March, but next year’s median has dipped to three hikes from four.
The statement says nothing controversial.
BNP Paribas’ US economics team:
The Fed’s communication was more dovish than expected, despite virtually no change in the economic forecasts, implicitly acknowledging increased downside risks (despite no explicit statement on that balance). There was a larger than expected shift down in the 2016 interest rate dots and no hawkish dissent. Six participants now foresee only one hike this year (compared with one participant in March). This suggests a desire for considerably more evidence before the next move.
Ward McCarthy, Jefferies:
The most important messages from the policy statement and [economic projections] are:
1. The fed funds rate Dot Plot projections were lowered once again. 2. The median 2016 year-end fed funds rate projection remained at 7/8%, implying two rate hikes, but is three votes away from a 5/8% median and one 2016 rate hike. 3. The 2017 and 2018 median fed funds rate projections were lowered substantially. 4. The FOMC did not elevate “global economic and financial developments” as again posing risks despite Brexit, but will continue to monitor “global economic and financial developments.” 5. There were no hints relating to the specific timing of the next rate hike in the normalization process. 6. The first paragraph description of the economy was more optimistic about growth but described job gains as “diminished.” 7. Esther George did not dissent.
Chris Rupkey, Bank of Tokyo-Mitsubishi:
The Fed took no action on policy today. That was not unexpected. What was unexpected is that they reduced their forecasts for how quickly they could raise rates over the coming years. And we do mean years. […]
Net net the Fed is telling us that the economy is not strong enough for rates to be raised at even a gradual pace. They now look to raise rates only cautiously and gradually. They injected a note of caution today and are less certain of the outlook. It looks like the two month slowdown in payroll jobs has really gotten under their skin. Given them goosebumps such that even the hawks have stopped dissenting for more. The markets are right to ask what does the Fed see that you don’t see. They see a world of increasing risk make no mistake about it. They are more worried than their words can say. Bet on it.
Don Rissmiller, Strategas Research Partners:
In a unanimous decision with no dissents, the Fed held rates steady today. The FOMC noted that the “pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.” The chance of a July hike remains low after this statement as well – there was no “balance of risks” statement in today’s text. This makes sense in light of the coming BREXIT vote in the U.K., as well as uncertainty over the last U.S. payroll employment report. […]
The FOMC may aspire to raise rates twice this year, but that’s looking more and more difficult. The Fed still wants to normalize (they would like the fed funds rate closer to the inflation rate), but they have slowed down considerably.