NEW YORK (Reuters) – The Federal Reserve kept interest rates unchanged on Wednesday but signaled in new economic projections that borrowing costs will likely rise by another half of a percentage point by the end of this year as the U.S. central bank reacted to a stronger-than-expected economy and a slower decline in inflation.
The new projections by the Federal Open Market Committee added a hawkish tilt to Wednesday’s interest rate decision, showing policymakers at the median see the benchmark overnight interest rate rising from the current 5.00%-5.25% range to a 5.50%-5.75% range by the end of the year. Half of the 18 Fed officials penciled in their “dot” at that level, with three seeing the policy rate moving even higher – including one official who sees it rising above 6%.
MARKET REACTION:
STOCKS: The S&P 500 turned 0.38% lower
BONDS: Benchmark 10-year note yields jumped to 3.827%; The 2-year note yield rose to 4.755%
FOREX: The euro cut its gain to 0.19% and the U.S. Dollar Index pared a slight loss
COMMENTS:
ANGELO KOURKAFAS, SENIOR INVESTMENT STRATEGIST, EDWARD JONES, ST LOUIS
“We’re seeing a more hawkish pause. For the first time in this cycle the Fed is not hiking rates but the market is looking … clearly looking at the 2023 estimate that implies more than one additional hike.”
“In this way policy makers can maintain some flexibility depending how the economy and inflation progress. “Looking at the resilience of the economy keeps the Fed on high alert rather than letting its guard down too soon.”
“The message is clear from CPI and PPI that we continue to see progress but with inflation still above the 2% target the Fed cannot yet declare victory.”
“The Fed is calling for a more resilient economy this year and a smaller rise in unemployment. That fits with the theme that things are holding up better. From a Fed perspective its good news the economy is resilient but they want to achieve some kind of slowdown.”
“The market realizes that the Fed is getting close to the end of the tightening cycle … They’ve done a lot in a short amount of time. It enables them to be a little more patient.”
“The more surprising thing was the median forecast calling for 2 more hikes rather than one. As we put into perspective how much they’ve hiked already it’s not as hawkish as this might have appeared when they were starting up. However, the idea of any rate cuts is off the table for this year.”
MICHAEL BROWN, MARKET ANALYST, TRADERX, LONDON
“A hawkish skip from the FOMC this evening, with rates left unchanged as expected, but the Committee signaling that at least two further rate hikes are likely to come before year-end via the 50 bps upward revision to this year’s median dot.”
“Clearly, the strength of the labor market, and ongoing concerns over the stickiness of core inflation are continuing to drive policymaking for Powell & Co, with a victory lap to celebrate the inflation beast having been slain still some way off.”
“Markets have, unsurprisingly, reacted hawkishly as the decision dropped – firmer USD, higher Treasury yields, and marginal downside in stocks – a pattern that, if Powell continues the hawkish tone at the press conference, could set the tone for trade over the rest of summer.”
WHITNEY WATSON, GLOBAL CO-HEAD OF FIXED INCOME, GOLDMAN SACHS ASSET MANAGEMENT (emailed note)
“Today’s decision to pause on policy actions was consistent with recent labor market and inflation data. But with the economy proving resilient, downside risks from banking stress fading, debt limit uncertainty behind us and inflation still hovering above target, we are unsurprised that the Fed has also hinted that “additional policy firming” may be warranted, with the median projection for the Fed funds rate at the end of the year rising from 5.1% in March to 5.6%.
“Job openings are on a moderating path, average hourly earnings are trending down and the composition of the CPI inflation report for May is encouraging.
“The upside surprise in last month’s core CPI reading was driven by used car prices, however, the Manheim Index—a timely measure of the outlook for used car prices—points to a moderation ahead. Importantly, the slowdown in shelter inflation was sustained and the breadth of price rises softened further. Indeed, the Cleveland Fed trimmed mean CPI inflation measure—which omits volatile categories—has fallen from an annualized monthly peak of 9.5% in October 2021 to 2.8% in May.”
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, CFRA RESEARCH, ALLENTOWN“The market has sold off because investors are concerned that there will be possibly at least two more rate hikes between now and the end of the year with no rate cuts.”“Some people were expecting that the Fed would actually pause this month, but also not raise rates anymore, that they were high enough. While others were thinking that they’ll pause at this meeting but maybe add one more hike in July and then that would be it. However, it does seem as if the FOMC members have become even more hawkish since the last meeting, and I think that has taken investors by surprise.”
PAUL NOLTE, PORTFOLIO MANAGER, KINGSVIEW INVESTMENT MANAGEMENT, CHICAGO
“You’re looking at an economy that is in some areas running very hot, the services side especially and they’re (Fed) waiting for unemployment to turn higher, which it hasn’t really.”
“It’s not a surprise to see the market sell off a little bit because they have been so bullish in anticipating that the Fed is going to continue to be dovish and it has been proven wrong consistently.”
MICHAEL JAMES, MANAGING DIRECTOR, EQUITY TRADING, WEDBUSH SECURITIES, LOS ANGELES
“The market was pretty overbought going into the meeting and any sign of hawkish commentary was going be negative. We received it and that’s the initial knee jerk reaction. We need to get more color from Chair Powell but the initial statement clearly reads more hawkish than the market was prepared for, at least coming into the statement.”
(Compiled by the Global Finance & Markets Breaking News team)
