KEY POINTS:
* In what amounted to a tactical retreat, the U.S. central bank said an array of global risks and other factors had convinced it to delay what would have been the first rate hike in nearly a decade.
* "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term," the Fed said in its policy statement following the end of a two-day meeting. It added the risks to the U.S. economy remained nearly balanced but that it was "monitoring developments abroad."
COMMENTS:
JOHN MILLER, CO-HEAD OF FIXED INCOME, NUVEEN ASSET MANAGEMENT, CHICAGO:
“I think the comments accompanying the release regarding low inflation, regarding stronger dollar, weaker global economies putting further pressure on inflation, I suspect are still going to be the case for the rest of the year and its probably another close call in December. I think (October) would be too soon after this review of the economic fundamentals to change it that quickly.
“(For municipal bonds) you've seen demand soften... 13 out of the last 15 weeks have been negative for fund flows. New issues come to the market priced very cheaply and that’s to stimulate demand. I think the main reason for that, is that people have been reluctant to buy municipals before a rate increase, even if you look historically at how munis have done through a rate hike cycle, they've actually done fairly well. The toughest time has been before the first hike. It’s a defensive positioning on behalf of individual investors and that demand is a little softer than it should be relative to what the values are - and the performance.”
DANIEL SOLENDER, DIRECTOR OF THE MUNICIPAL BOND GROUP, LORD ABBETT, JERSEY CITY:
“I think the fact that rates are not moving up is helpful for demand. There’s been a little bit of a slowdown in demand for munis over concern about what the Fed may do. Demand has the potential to increase going forward because it’s been negative the last few weeks.”
BRIAN REHLING, CO-HEAD OF GLOBAL FIXED INCOME, WELLS FARGO, ST. LOUIS:
“In our minds it was the correct decision. The inflation data does not support a rate hike at this time. You throw in some of the global turbulence and supports the decision to leave rates unchanged, which was our base case. I was a little disappointed in the lack of forward guidance here. I thought we’d get a little indication of the timing of a move. There isn’t a lot of forward guidance here.”
JIM COLBY, SENIOR MUNICIPAL STRATEGIST, VAN ECK GLOBAL, NEW YORK:
"For the better part of two years, the municipal market participants have been awaiting the moment when the long endured era of Zero interest rates is over. From the ‘taper tantrum’ in 2013 to this year’s 'long wait,' muni managers have been reluctant to advise clients to embrace a strategy of further commitments until the FOMC makes a definitive move. The municipal asset class is one of generally low volatility and high quality, fairly perfect for periods of uncertainty. But investors do not like uncertainty and, hence, have stayed away from municipals.
"An announcement of no move by the Fed is likely to leave muni investors with a sense of unease and a reluctance to move forward despite compelling advantages and relative values."
DAN HECKMAN, SENIOR FIXED INCOME STRATEGIST, U.S. BANK WEALTH MANAGEMENT, KANSAS CITY, MISSOURI:
"We’re disappointed in the announcement. We thought there was plenty of reasons to hike rates. We’re not surprised they didn’t, but we’re disappointed. It seems the Central Bank and the volatility from overseas outweighed other aspects of what we see in the economy. When you look at the employment rate, job openings and labor turnover, and unemployment claims, you can make arguments as to why we should not be at zero interest. Unfortunately, the longer the Fed waits, the greater the odds are that we are going to slip into a slowdown.
"We think munis have been cheap all year long. This announcement makes the relative attractiveness even more so. For those who have been buying recently, we think they will get rewarded in the short term. I think munis would have been fine if the Fed had raised 25 basis points as well. Longer term muni rates would have stayed reasonably calm, perhaps even come down a little bit. We may be waiting quite a bit longer for the Fed to raise rates."
J.J. KINAHAN, CHIEF STRATEGIST AT TD AMERITRADE, CHICAGO:
"The probabilities of the fed funds played out versus opinion. Going in we saw a probability of only 25 percent and at the end of the day they didn't do anything. The one thing that was surprising was that they did talk about a global slowdown. That is a concern for them. We saw in the Chinese market last night that it was a concern for others too."
JOHN BONNELL, SENIOR PORTFOLIO MANAGER, USAA INVESTMENTS, SAN ANTONIO, TEXAS:
“We’ve always been in the camp of lower rates for longer. We didn’t think the economy was really overheating even though the U.S. economy looks fairly strong. We’re in the same situation we were in before, which is uncertainty about when are they going to move.”
GEORGE RUSNAK, CO-HEAD OF GLOBAL FIXED INCOME FOR WELLS FARGO INVESTMENT INSTITUTE IN PRINCETON, NEW JERSEY:
“The Fed left it pretty open-ended as to when they will hike rates. There’s a little bit of relief obviously that it’s not happening today, but there are questions and head-scratching as to when it will happen. There are some hints or guidance there that potentially, a Fed rate hike may not even happen this year.”
ROB BERNSTONE, MANAGING DIRECTOR IN EQUITIES TRADING, CREDIT SUISSE, NEW YORK:
“Really it's a question of expectations management - there is of course a lot of consensus on the direction of interest rates over the next year or so. It’s the velocity and magnitude of the move that many people are anxious to see, and therefore the commentary is the issue. So the language around any international headwinds is naturally drawing some attention.
"To that point, within the equity markets, there is obviously a potential divergence between the EM space and the US market- especially given recent volatility. Pre-announcement we were busy with two-way flow that was consistent with a theme of people squaring off positions ahead of the announcement. Post the announcement, obviously financials were hit hard immediately after the announcement while rate plays such as utilities have been rallying.“
ROBERT TIPP, CHIEF INVESTMENT STRATEGIST AT PRUDENTIAL FIXED INCOME IN NEWARK, NEW JERSEY:
“The Fed is giving the international backdrop and the tightening of financial conditions the consideration that the situation really requires.
“The (bond) market is rallying because there continues to be probably a sea change at the Fed, where they’re in increments changing the battlefront from fighting inflation to fighting the systemic downside risks that exist in a global economy with far more leverage than ever before.
“There’s relief (in the bond market) that there’s less pressure for hikes this year, but most significantly you see the pressure coming off next year and the year after that.”
ROBERT YAWGER, DIRECTOR, ENERGY FUTURES, MIZUHO SECURITIES USA IN NEW YORK:
"At least for a bit you should see crude lifted in reverse correlation to a weaker dollar. The stock market initially reacted higher and oil should get a boost in a similar risk-on reaction to the Fed's decision."
MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISER, ALLIANZ, NEWPORT BEACH, CALIF.:
“The Federal Reserve’s decision to hold off on a rate hike reflects the extent to which it is worried about further destabilization in global financial condition spilling back and undermining the U.S. recovery. They are reluctant to add to international financial fragility; and they wish to limit adverse spill back to the U.S. economy.”
TOM PORCELLI, CHIEF US ECONOMIST, RBC CAPITAL MARKETS, NEW YORK:
“There is very little doubt at this point (before the press conference) that everything the Fed has just given us is dovish. The insertion of real economic and financial developments as restraining activity is clearly why they decided to take a pass in September.
“There’s always going to be some hurdle in the way. If you are incorporating global economic and financial market developments into your calculus then it will be very difficult for this Fed to get off of zero. The window is closing rapidly on them.
“We’re not talking about a globe that is collapsing, some parts of the globe are slowing down. With a modest slowdown occurring what the Fed is effectively doing is they are handing off the reigns of monetary policy to the rest of the world.”
PUTRI PASCUALY, MANAGING DIRECTOR, PAAMCO, IRVINE, CALIF:
"It’s been a game of chicken between the Fed and the market and the market won. It is a continuation of the Fed policy that we've seen so far. The Fed has always hinted that it plans to go low and slow and this is another data point for that.
RYAN LARSON, HEAD OF U.S. EQUITY TRADING AT RBC GLOBAL ASSET MANAGEMENT IN CHICAGO:
“Most people won’t know what to say! The only thing with them not doing it at the September it continues to the present with uncertainty between now and December, if they do December at all. Obviously, with everything that’s going on overseas in terms of China and emerging markets, the market here in the U.S. maybe wondering what the Fed that they’re communicating in terms of the implications from developments in China or emerging markets and how that deters our outlook going forward.
“Again, it presents further uncertainty. From that standpoint, it’s almost like we’re going to be stuck in this range until December because most likely they’re not going to do their first rate hike in roughly 10 years at a meeting where there’s no press conference, so that puts December front and center. Our bet was on December, but it would have been nice to see Yellen come out and just do this and get this out of the way in September, let the market deal with it a couple of days, and then slowly realize what the Fed is doing is for the right reasons. Now it’s capping us with uncertainties in the marketplace at least for the next couple of months.”
DAVE MACEWEN, CO-CHIEF INVESTMENT OFFICER, AMERICAN CENTURY INVESTMENTS IN KANSAS CITY, MISSOURI, $145.8 BILLION IN ASSETS UNDER MANAGEMENT:
"I think the Fed, through their inaction is creating quite a bit of uncertainty in the market when the Fed is the central thing that everyone in the market is talking about and there is a perceived risk of them nudging up rights. You have people like Lawrence Summers out there saying the world is going to end when they start to raise rates. It creates a lot of uncertainty. I think the economy can clearly withstand some tightening and I think they should just get on with it."
JINWEN ZHANG, EXECUTIVE VICE PRESIDENT, THOMAS WHITE INTERNATIONAL, CHICAGO:
"They’re looking at financial conditions in the market and what has happened over the last few months. The turmoil in emerging markets, for example.
"It’s possible it will happen in December. What happens in the next few months will be the determining factor for a December decision. It likely won’t be in October. Overall weakness in overall growth is part of the reason and the slowdown in China and decreasing in commodity prices are already affecting things. They can’t get away from emerging markets and the global environment, they can’t avoid it."
URI LANDESMAN, PRESIDENT, PLATINUM PARTNERS, NEW YORK
"The decision will be taken positively by the market. This is still a 'what you focus on' situation. I’m a growth guy and to me this suggests that the economy isn’t growing. I would expect the market to rally on this. I think any month now is a possibility. Unless the data turns down they will do it before the end of the year. They don’t want to risk the economy not being completely solid."
BRUCE BITTLES, CHIEF INVESTMENT STRATEGIST AT MILWAUKEE-BASED BROKERAGE AND RESEARCH FIRM ROBERT W. BAIRD & CO:
“Now we’ve got to look forward to the next employment report and if it’s strong it will create a lot more anxiety about a rate hike in October or December. I’m not so sure that this is the best thing that could have happened. I think we’ll be in a trading range and stay there.
“The risk is if the labor market really starts to heat up and wages rise. Then we will have a much tougher decision to make.”
SCOTT WREN, SENIOR GLOBAL STRATEGIST FOR WELLS FARGO INVESTMENT INSTITUTE IN ST. LOUIS, MISSOURI:
“If you look at the statement, the section that caught my eye was where it says when they see further improvement in the labor market and it is reasonably confident inflation will move back to its two percent objective.
"I tell you, if you look at core PCE at up 1.2 percent year over year, that is miles and miles and miles away from 2 percent – it’s a long way. We would argue the labor market is not tight, whatever full employment rate is, it’s not 5.1 percent, I don’t know what it is. When you look at wage growth not hardly doing anything, when you look at almost 10.5 percent of the working population is either unemployed or underemployed, that is why wages aren’t going up. The labor market is not tight, inflation is nowhere near their target, it totally doesn’t surprise me they didn’t do that. Saying that, they almost backed themselves into a corner here, our call is they do make one move this year, it is going to be in December. It is going to be a 25 basis point move and it’s basically a credibility, 'let’s get the normalization ball rolling' here.
"When I read this statement, this is a dovish statement. I am a little surprised really that the S&P isn’t higher. I think the market still feels pretty good that we are going to see something in December and that is probably taking some of the edge off. If they are going to move in December, if they were going to start dropping hints today, and (Fed Chair Janet Yellen) might during the press conference. But I thought we would see something in writing as well and I don’t see it in here. That is unfortunate because this is not too far in advance, because if they are going to move in December, they need to start telling people pretty soon here, get on the same page and hammer it home.”
STEVE GUTCH, SENIOR PORTFOLIO MANAGER, FEDERATED INVESTORS, ROCHESTER, NEW YORK:
"There was just too much global uncertainty right now, and the risk of raising rates from zero is different from raising rates if you're at 4 percent. In our view, they are going to wait until it's essentially crystal clear before they raise rates.
"Now it's a waiting game. In our view, we don't think this is material, and I would expect a volatile market to continue.
"The market sold off a little bit but you had a lot of interest-rate sensitive stocks that were appreciating quite well today, so somebody was putting a trade on that they were going to raise rates."
OMER ESINER, CHIEF MARKET STRATEGIST AT COMMONWEALTH FOREIGN EXCHANGE INC. IN WASHINGTON:
"I can't say it was a major surprise that the Fed did not move. I am a little surprised at the dovishness of the statement. I would have expected 'no move' to be accompanied by a slightly more upbeat assessment of the economy. Instead, what we got was more focus on macroeconomic uncertainties, and that was a little bit of a surprise."
HUGH MCGUIRK, HEAD OF MUNICIPAL BONDS TEAM, T. ROWE PRICE, BALTIMORE, MARYLAND:
“I’m a little disappointed. We’ve got to rip the Band-Aid off. Clearly they’re being very cautious, as they have been all along. We’ll just have to wait until October.”
GENE MCGILLIAN, SENIOR ANALYST, TRADITION ENERGY IN STAMFORD, CONNECTICUT:
"It will probably be neutral for oil, although maybe you could say it will weaken the dollar and that would be supportive to oil.
"But we've been at this level so long and this just moves the Federal Reserve watch to the next meeting. The oil market will go back to watching to see if the economic slowdown in China spreads to other economies and whether low oil prices start to lower U.S. oil production significantly."
BOB MICHELE, GLOBAL CHIEF INVESTMENT OFFICER, HEAD OF GLOBAL FIXED INCOME, JPMORGAN ASSET MANAGEMENT IN NEW YORK, $500 BILLION IN ASSETS UNDER MANAGEMENT:
"I am not surprised. I would have been shocked if the Fed raised rates because the market wasn’t at all prepared for it. It’s the first rate hike in nine years, they have to be careful. Do I think they should have raised rates? Yes I think they have had the opportunity, but they clearly decided that the international economic conditions warranted waiting for a while. I think they could have stuck to their guns. I think they need to get off the zero lower bound."
BRIAN DOLAN, HEAD MARKET STRATEGIST, DRIVEWEALTH, NEW JERSEY:
"The Fed did the right thing. There's no need to rock the boat right now. Again the disconcerting element is the downgrade to the interest rate trajectory, which could provide solace to investor sentiment overall. Given the global headwinds, the last thing we need right now was a hike in rates and any kind of hawkish projections."
MARKET REACTION:
STOCKS: U.S. stock indexes rose initially, then slippedBONDS: U.S. bond prices extended gainsFOREX: The dollar hit session lows against the euro and fell against the yen
(Americas Economics and Markets Desk; +1-646 223-6300)
