Published June 19, 2013
The Federal Reserve on Wednesday said it would keep buying $85 billion in bonds per month and gave no explicit indication that it was close to scaling back the program, despite intense market speculation it could soon start drawing it to a close.
KEY POINTS: * Describing the economy as expanding moderately, Fed officials cited further improvement in labor market conditions, and noted inflation had been running below the Fed's 2 percent long term goal. * They also reiterated that unemployment is still too high for their comfort, reinforcing their desire to keep buying assets until the outlook for jobs improves substantially, but offered a slightly more upbeat assessment of the balance of risks to the nation's growth. * In fresh quarterly projections, 14 of the 19 members of the Fed's policy-setting committee said they did not think it would be appropriate to raise rates until sometime in 2015. * Three officials saw 2014 as the year that rates would lift off from near zero, versus four policymakers back in March. One official continued to anticipate the first rate hike in 2016 and one in 2013.
BRIAN LEVITT, SENIOR ECONOMIST AT OPPENHEIMERFUNDS IN NEW YORK, NY:
"The Fed is obviously more optimistic than they had otherwise been about the U.S. economy and I think it confirms a lot of the better economic conditions that we had been seeing too.
"Certainly the Treasury market is telling us something. The Fed does not appear to be as worried about things as they had suggested in prior statements and that signals to the market that they are taking somewhat of a more hawkish tone.
"They're more sanguine about U.S. economic growth and they're less likely to be dovish on monetary policy. I would view this as good news. It's a long process of normalization, it doesn't mean tight conditions overnight, and the fundamentals of the equity market still look reasonable.
"I don't think investors should be eliminating equity positions because the Fed is beginning a long process of policy normalization.
"Investors always freak out at what looks like a sea change in policy, but typically policy normalization and or tightening is coincident with improving macro conditions and a generally healthy environment for stocks.
"It's a slight change in language that suggests that the Fed is more optimistic than they were in the May statement. After Bernanke's comments a few week ago suggesting that tapering could be in the offing, that's what the market's trying to price in."
MICHAEL MATOUSEK, HEAD TRADER AT U.S. GLOBAL INVESTORS INC., SAN ANTONIO, TEXAS:
"Right when it first came out I think everyone was shooting first and asking questions later because you had gold selloff, you had the dollar rally, and you had 10-year yields pop up. So basically with the yields going up that means people are selling off their bonds, they want to own the dollar, and they're not looking at gold right now.
"It seems like a lot right now, that the S&P is down 92 basis points, some people are saying ���wow the S&P is getting hit,' but when you really look at it, last year this would have been a normal move for the S&P. It's still a positive for the economy. I don't think it's going to derail anything in that respect.
"The S&P came to the 1608 level since the beginning of June and bounced back from there, so if it does pull back you're going to see market participants come back and start building. It's a good level, people aren't chasing the market as much as they were the past few months of the year.
"I think people are looking for a reason to sell stuff��� Odds are, they're going to start nibbling again when the market pulls back."
KEN MAYLAND, PRESIDENT, CLEARVIEW ECONOMICS, PEPPER PIKE, OHIO:
"Is the economy achieving even average growth? Are payrolls expanding 200,000 per month on a sustained basis? Are prices rising too fast, and expectations of price increases exceeding target rates? No, no, no! So forget about 'tapering' for at least the next few months. The financial markets are over-thinking this. Extreme accommodation, in the form of super-low short-term interest rates, is likely to remain in effect for an extremely long period of time."
STEPHEN MASSOCCA, MANAGING DIRECTOR, WEDBUSH EQUITY MANAGEMENT LLC IN SAN FRANCISCO:
"You would think everything he would be saying would be good for bonds, not bad for bonds. This started well before he started speaking. It's beyond me. I could see if the taper had begun. The only thing I could think of is that people were positioned to short the dollar and they used the proceeds from being short the dollar to be long bonds and somehow they see this is as being positive for the dollar. But none of this makes any sense - it's almost the opposite of what is expected.
"The minute the news came out the bond market went down. This has been driven by the bond market, that is what is driving the stock market. There is no reason for the stock market to be down other than the fact the bond market has turned around. All these dividend-paying stocks are getting hit and a lot of people who are panicking out of places they have been to collect yield and people are concerned that maybe those spaces are too overcrowded. If you are unhedged today your hair is on fire."
AXEL MERK, PRESIDENT AND CHIEF INVESTMENT OFFICER, MERK INVESTMENTS, PALO ALTO, CALIFORNIA:
"The main news is that they do indeed plan to taper purchases later this year and hope to be done by next summer. Bernanke wants to communicate that this is not necessarily tightening, but the market may not see it that way. But remember, their forecasts are rarely accurate. So this may be them engaging in the same wishful thinking as everybody else. We'll have to see whether the numbers cooperate. What we do know is that inflation expectations are coming down with a vengeance and the employment is not improving at a very strong pace."
FRED DICKSON, CHIEF MARKET STRATEGIST, D.A. DAVIDSON & CO., LAKE OSWEGO:
"He took off the table the possibility of tapering in September, but his comments about the possibility of slowing down rate of asset purchases toward the end of the year and eliminating them by mid-year provided some clarity... but may have caused a little bit of surprise.
"He gave the first clue as to when possibly the asset purchase program might stop, and that was the catalyst that caused the market reaction."
JOSEPH GRECO, MANAGING DIRECTOR AT MERIDIAN EQUITY PARTNERS IN NEW YORK:
The selloff is "clearly a reaction to Fed's affirmation that with improvements in employment and the economy it would appear possible that they would mostly likely pursue a varied pace of asset purchasing by the end of this year."
FRANK MCGHEE, HEAD PRECIOUS METALS TRADER, INTEGRATED BROKERAGE SERVICES LLC, CHICAGO:
"The statement indicates that the economy is on the mend, and the Fed is expecting lower than previously projected levels of inflation. You are looking at continued slow growth but no inflation and no panic on the horizon, that makes gold less attractive and ultimately makes stocks more attractive."
ROB LUTTS, PRESIDENT AND CIO, CABOT MONEY MANAGEMENT, SALEM, MASSACHUSETTS:
"The most surprising thing was the raising of the growth rate for 2014. They took it up a healthy notch. That's telling you they see a pattern of continued strength that will continue to move forward into next year.
"Widely expected they were to going to talk about tapering and a September/October time frame for easing off bond purchases. That maybe is helpful to the market that it is not immediately around the corner. Maybe people are thinking it is 2014 rather than 2013 but clearly it is coming.
"The growth figure is what the bond market is going to focus on most and bond participants are saying if the Fed is correct we have to start thinking higher rates in the near term.
"They punted on tapering. They know the market expects it and if the market needed to hear more they would have said something. I believe they feel the market has tapering fully in it. By raising the growth number they have effectively done a similar thing. That is a stronger communication. Many economists have a slower recovery in place and it means maybe a more normal economic environment next year."
GREG MCBRIDE, SENIOR FINANCIAL ANALYST, BANKRATE.COM, NEW YORK:
"Interestingly there is greater dissent being voiced within the voting members of the committee, the new vote against actually indicating potentially a desire for even more stimulus to defend the inflation goal. It clearly balances out that hawkish dissent, particularly at a time when the economy is still not where the Fed wants it to be, and gives them a case to maintain the pace of stimulus throughout the summer months.
"The statement contained a notable pat on the back, saying the downside risks to the outlook for the economy and the labor market have diminished since the fall, which is a necessary precursor if they are going to get to the point where they do start to taper."
GEORGE RUSNAK, NATIONAL DIRECTOR OF FIXED INCOME FOR WELLS FARGO PRIVATE BANK IN PHILADELPHIA:
"Clearly it seems like the Fed is signaling they will begin tapering. They are either going to start in either the fourth quarter or the first quarter of next year, but that is going to happen. The idea of when that happens is going to be the first sign of trying to ease into that process.
"The fact they brought in the conversation around unemployment potentially hitting their target towards the year-end of 2014. That maybe not necessarily spooked the bond market but may have given an idea to the bond market that not only are they talking about removing themselves from QE but potentially removing themselves from a zero interest rate policy at the end of next year."
CAMILLA SUTTON, CHIEF CURRENCY STRATEGIST, SCOTIABANK, TORONTO:
"I think the FX reaction was due to the upgrade in employment forecasts. The forecasts suggested that the unemployment rate will fall to 6.5 percent in 2014, which means that the Fed could hike rates sooner than expected, possibly as early as the first quarter of 2015. And that's positive for the U.S. dollar."
IAN LYNGEN, SENIOR GOVERNMENT BOND STRATEGIST, CRT CAPITAL GROUP, STAMFORD, CONNECTICUT:
"The net takeaway was the fact that they didn't offer anything specific on the timing for tapering QE. We had a new dissenter, being Bullard, who's now dissenting from the dovish side. He's more worried about inflation. However, in the statement the Fed characterized the benign inflation as partially reflecting transitory influences but reiterated inflation expectations remain stable.
"They also upgraded the economic outlooks and said that the committee views the downside risks for the economy and the labor market as having diminished since the fall��� That simply means lower than they were in the fall. I think that is what people are looking at as a bit more hawkish in there and within the projections, I would say that the surprise for us at least was the fact that they lowered the unemployment rate forecast pretty significantly, suggesting that they believe that the improvements are going to be sustainable and implicitly that as the labor market accelerates, the labor participation rate will not increase at a pace to put upward pressure on the unemployment rate."
FRANK LESH, FUTURES ANALYST AND BROKER, FUTUREPATH TRADING LLC, CHICAGO:
"The thing that I noticed really so far was the fact that downside risks to the economy are diminishing. That to me would imply that we're closer to the Fed reducing its support for the economy, and that's all we know so far."
DAN DORROW, HEAD OF RESEARCH, FAROS TRADING, STAMFORD, CONNECTICUT:
"What was surprising was the change in 2014 forecasts for unemployment. They've also said the downside risks to the outlook have reversed. So they are slightly more constructive on the economy, and the unemployment call would move forward the first fed funds rate hike, which is still way out there but has been moved forward slightly. This is going to push yields up. We're seeing them rise at the shorter end of the curve, too, so you'd expect the dollar to go higher, especially against the euro and sterling."
BUCKY HELLWIG, SENIOR VICE PRESIDENT AT BB&T WEALTH MANAGEMENT IN BIRMINGHAM, ALABAMA:
"I think still today the driving event will be what Ben Bernanke says, but with regard to the statement, it was a positive from the standpoint that they're going to continue to buy at the $85 billion level, but some of the statements in there suggest that things are setting up for a taper at some point, and that's kind of when the (stock) market went the other way.
"The suggestion that economic activity has been expanding at a moderate pace and that labor markets show further improvements, I think market participants are reading that the economy is improving perhaps enough to put in some curtailment of the purchases later on... The more optimistic outlook on the economy, it looks like traders view that as tapering being closer rather than farther in terms of the calendar."
ENRIQUE ALVAREZ, LATIN AMERICA STRATEGIST, IDEAGLOBAL, NEW YORK:
"The U.S. is seeing stronger growth and somewhat lower unemployment projections. This means that this view that THEY are going to move up the curtailment of asset purchases is still on the table, it is not completely removed.
"As long as that is on the table it guarantees that Latin America is going to continue to see volatility in the markets, and the defensive stance of carry trades in the currency market is going to remain intact."
MIKE KASTNER, HEAD OF FIXED INCOME AT HALYARD ASSET MANAGEMENT IN WHITE PLAINS, NEW YORK:
"The statement was a little more dovish in the comments than I thought it would be. Long-dated Treasuries sold off. That was the story of the old bond vigilantes saying if the statement is more dovish, then inflation is more likely to be a problem down the road so get in front of that now by selling the bond and increasing the inflation premium.
"We will get a better sense of the timing of the tapering during the press conference as to whether it might occur in the next couple of FOMC meetings or whether it's pushed out to later this year or next year.
"The Bullard vote was a little bit of a surprise. That's why I consider it to be a net dovish statement."
VASSILI SEREBRIAKOV, CURRENCY STRATEGIST, BNP PARIBAS, NEW YORK:
"The markets are reacting to the more positive economic assessment in the statement, notably the comment that economic risks have diminished. I think it's being seen as a signal that the Fed is close to tapering. U.S. yields are higher and they're pushing the dollar higher as well against the other funding currencies such as the Japanese yen. Obviously we'll have to wait till the press conference to get any additional details on the tapering."
PARESH UPADHYAYA, HEAD OF CURRENCY STRATEGY, PIONEER INVESTMENTS, BOSTON:
"It's hawkish. They talked about the labor market showing improvement and that the downside risks have diminished since autumn. That reflects the fact that the fiscal tightening has not hurt as much as they had feared. The forecasts are significant, too. Not only is their outlook for 2014 better but their unemployment call has the jobless rate possibly hitting 6.5 percent in 2014. Depending on what Bernanke adds later, I think we'll be off to the races when it comes to higher Treasury yields and a higher dollar, especially against the yen. And we should see a sell-off in risky assets."
RICK MECKLER, LIBERTYVIEW CAPITAL MANAGEMENT LLC, JERSEY CITY, NEW JERSEY:
On the fall in stocks: "There's no change in the program. I would not be surprised to see a round-trip here where the first reaction is down because there's almost nothing that's going to change the ultimate move, which will eventually be to taper. What investors will need on the other side is just some evidence that's offset by economic growth. That's been missing lately."
TOM PORCELLI, CHIEF U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK:
"There were really no significant changes to the Fed statement, although they modestly improved their assessment of the labor market. Overall this was a net neutral statement and the meat of the market's reaction should come from the press conference."
IRA JERSEY, INTEREST RATE STRATEGIST, CREDIT SUISSE, NEW YORK:
"The statement disappointed a little, in that it made it sound like they are going to taper. They are not worried about the market's outlook for lower inflation, so they kind of ignored the TIPS market. Simultaneously they lowered their forecast for the unemployment rate a little bit, so in effect they may have pulled forward some people's expectations of a hike just a little bit. That's one of the reasons you are seeing the selloff in Treasuries that we are seeing, particularly in the belly of the curve."
RANDY FREDERICK, MANAGING DIRECTOR OF ACTIVE TRADING AND DERIVATIVES, CHARLES SCHWAB, AUSTIN, TEXAS:
"The interesting thing is that the VIX is lower when the market is lower. I don't think we saw anything that was surprising so far from the Fed and I don't really think that market was expecting anything new because you would really see institutions buying VIX puts and calls if they thought things would be uncertain. That wasn't the case. For now, it's nothing too surprising, but we would have to wait until Bernanke press conference."
TANWEER AKRAM, SENIOR ECONOMIST, ING, ATLANTA, GEORGIA:
"The statement is as expected in the sense that the FOMC acknowledged improvement in labor markets but acknowledged that the unemployment rate is still elevated and that fiscal policy is likely to restrain growth. It maintained its commitment to asset purchases conditional on the data. A bit different was there was a dovish vote by James Bullard stating the FOMC should be more accommodative in light of inflation undershooting the Fed's long-term target."
MARK LUSCHINI, CHIEF INVESTMENT STRATEGIST AT JANNEY MONTGOMERY SCOTT IN PHILADELPHIA:
"There's no great surprise, and this is something of a non-event statement. It didn't spook markets in terms of advancing notions of tapering, but it largely leans towards deferring that tapering until later this year. The fact that this is status quo is enough to put a little pressure on the market, largely because of the run-up we've seen over the past few days.
"It is interesting that Bullard voted to dissent against any altering of the policy, that bodes towards the idea that there will be tapering later this year."
STOCKS: U.S. stock indexes were modestly lower
BONDS: U.S. bond prices dipped, particularly long-dated bonds
FOREX: The dollar gained against the yen and euro
(Americas Economics and Markets Desk; +1-646 223-6300)