Fed leaves rates unchanged, acknowledges strong economy

NEW YORK (Reuters) - The Federal Reserve held interest rates steady on Wednesday but left the door open to a further increase in borrowing costs in a policy statement that acknowledged the U.S. economy's surprising strength, but also nodded to the tighter financial conditions faced by businesses and households.

MARKET REACTION:

STOCKS: U.S. stocks initially moved higher before paring gains and the S&P 500 was last up 0.4%BONDS: The U.S. Treasury 10-year yield was last down 6.5 basis points at 4.81 after dipping below the 4.80% mark.

FOREX: The dollar index briefly pared gains before reversing course and was last up 0.3% at 106.99 on the day.

COMMENTS:

WHITNEY WATSON, GLOBAL CO-HEAD AND CO-CHIEF INVESTMENT OFFICER OF FIXED INCOME AND LIQUIDITY SOLUTIONS, GOLDMAN SACHS ASSET MANAGEMENT, NEW YORK

"Despite the US economy achieving one of its strongest quarters of growth in 20 years and inflation remaining above target, the Fed maintained its current policy as tighter financial conditions, led by higher long-term interest rates, alleviated the need for a further rate hike.

"The economy's resilience has not stalled labor market rebalancing or revived wage and price pressures, suggesting disinflation will progress and indicating that the Fed will likely keep its policy unchanged into 2024.

"Nevertheless, there are risks in both directions. The rise inflation expectations, owing to higher gas prices, combined with strong economic activity, preserves the prospect of another rate hike.

"Conversely, a more pronounced economic slowdown caused by the growing impact of higher interest rates might accelerate the timeline for transitioning to rate cuts."

DAVID DOYLE, HEAD OF ECONOMICS, MACQUARIE, TORONTO

"FOMC held rates as was widely anticipated.

"The statement contained only minimal changes reflecting developments that had occurred since September's meeting

"These included an upgraded assessment of recent growth, a slight adjustment to description of job growth, and a reference to recent tightening in financial conditions as likely weighing on economic activity.

"On net these developments aren't likely to shift policy perceptions much and can be interpreted as a status quo outcome. The Fed's pause continues, but it continues to have a hawkish bias and is leaving further hikes on the table.

"Chair Powell's press conference could be more market moving as he could provide insight into credit tightening and the results of the Senior Loan Officer Opinion Survey. He could also elaborate on his comments from mid October that the neutral rate may have risen."

GINA BOLVIN, PRESIDENT OF BOLVIN WEALTH MANAGEMENT GROUP, BOSTON, MA

"The Fed acknowledging that 'financial conditions have tightened' may keep riskier assets from rallying in the short term.  So far, no change in the fed funds rate leaves fixed income and the equity market unchanged. The Fed is probably done."

GREG FRIEDMAN, MANAGING PRINCIPAL AND CEO, PEACHTREE GROUP, ATLANTA

"Today's announcement marks a stride in the direction of the Fed establishing greater predictability, fostering market stability and reducing a significant portion of its volatility in the market. A more consistent interest rate environment will pave the way for price discovery, normalization and resetting values across commercial real estate sectors."

MARVIN LOH, SENIOR GLOBAL MACRO STRATEGIST, STATE STREET, BOSTON

"There was kind of this overarching view that they were going  to take these higher longer-term yields and use it as a reason to not hike anymore because, implicitly in their mind it equals one or two rate hikes depending on whom you ask.

"And then they added in the second paragraph the term 'financial conditions' to the credit concerns that are going to 'weigh' on economic activity. I guess the market is going to run with that.

"The key is that the data is still strong and the Fed probably is not going to be in a position to actually signal that they're done until that data actually gets them to a point where they can feel comfortable with that.

"Lacking a hawkish message to come out of the policy statement, the market is interpreting it dovishly and then we'll wait for the presser."

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

"The Fed left rates unchanged as expected. They hinted that the economy is going to weaken, and inflation remains elevated.

"The statement leans to the dovish side. It's less hawkish than I expected. The fact that they left rates unchanged for the second time in a row suggests the Fed might leave rate unchanged and in December, and if they do that means the Fed is done.

"Of course, they're going to stay data dependent. If inflation reverses, obviously they're not done."

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN"Powell will have to explain why they added 'financial' to the 'credit conditions' that they're watching. Does the bond market have a Powell Put? It might. They could throttle back quantitative tightening since they have a triple mandate: full employment, stable prices, and moderate long-term interest rates. The Fed shouldn't pretend as though it stepping out of the Treasury market as a price insensitive buyer doesn't matter."

MICHAEL BROWN, MARKET ANALYST, TRADERX, LONDON

"The FOMC broadly stuck to the expected script this evening, holding rates steady for a second straight meeting, with the policy statement largely a 'copy and paste' of the version released around six weeks ago. While a further hike, as signaled by the September 'dot plot' remains possible, given the resilience of the labor market and upside risks to the inflation outlook, the longer the FOMC remain on pause, the slimmer the already minimal chances of such action become.

"Nevertheless, the 'higher for longer' policy stance remains in place, with markets seemingly premature in fully pricing the first 25bp cut by next July."

CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, NC   

"The Fed left rates unchanged, as expected and make some minor adjustments to the statement, but nothing dramatic. It makes Powell's press conference all the more important.

"Investors will be listening very closely to Powell's word's. People will be trying to parse it. Is the bias toward tightening or is the bias toward easing? I think everyone's going to try to slice and dice his words to try to figure out is the next meeting a live meeting."

ELLEN HAZEN, CHIEF MARKET STRATEGIST, F.L.PUTNAM INVESTMENT MANAGEMENT, WELLESLEY, MASSACHUSETTS

"Hard to say if we are at the end of hikes. The Fed very much wants to keep the door open for additional hikes in December or next year. They did make a few changes to the wording, two of which reflect the assessment that the economy is actually stronger than it was at the last statement. So they changed the word describing economic activity from solid to strong, so that is an improvement. And the other word they changed was for job gains - they used to say slowed and now moderated. Both of those are on the positive side.

"Of course, they added the note of financial conditions, that is actually the most interesting aspect and I expected will be the focus of a lot of the questions - why did they add financial conditions. I think it is in response to what we have seen - we have seen real rates rise, the 10-year real rate is at the highest in 15 years, the 10-year real rate hasn't been this high since 2008. That means the long end of the curve is doing some of the work for the Fed, and they are reiterating with this statement by saying 'yes we know financial conditions have tightened.'"

(Compiled by the Global Finance & Markets Breaking News team)