What Wall Street Is Saying About the Fed's Hawkish Hold

"A shift to a hiking bias."

Fed revives forward guidance with "next meeting"

On Wednesday, the Federal Reserve made it clear that liftoff before the end of the year was still on the table, causing markets to briskly recalibrate the likelihood of a December rate hike.

The highlights of the statement included one big adjustment to forward guidance and the removal of a line that the central bank cited as reason to forego lifting the rate in September, as well as noteworthy tweaks to its evaluation of the U.S. economy. 

As markets digested the new information, the U.S. dollar rallied while Treasuries sold off. Though economists agreed that this reaction suggested investors were positioned for a more dovish statement, they differed on just how hawkish the Fed's shift in rhetoric really was.

Here's what Wall Street had to say about the central bank's communique:

Société Générale global strategist Kit Juckes

If markets don’t tighten financial conditions for them, if the US data remain firm, if global events don’t scare them and if the sun shines every day, the Fed will raise rates at their December meeting. All those caveats leave the market pricing the odds of a move at close to 50%, and the focus switches immediately to data-watching.

RBC Capital Markets chief US economist Tom Porcelli

We have heard countless times in the wake of the FOMC announcement that the statement was hawkish to allow for maximum flexibility come December. That characterization seems a bit off-base. Not to split hairs here, but the Fed made these changes to try and get the market to believe that December is a real possibility because without the markets buy-in, they simply will not go. So by pushing the market in that direction it shows a clear inclination toward raising rates – that’s not maximum flexibility, that’s a shift to a hiking bias. And they moved to this bias even with soft retail sales and jobs reports.

Citigroup head of North America economist William Lee

The October meeting of the Federal Open Market Committee (FOMC) showed how ephemeral the criteria for raising interest rates have become. Indeed, the importance of placating markets has risen in importance to rival or even dominate the traditional dual mandate. Consequently, markets have lost their monetary policy anchor, and even have come to influence the policy direction…markets have calmed since the September meeting, prospects of a December rate increase have improved—until the next bout of market volatility. Expecting markets become more volatile than their current benign state between now and December, we maintain March 2016 as the most likely date of the first increase.

Bespoke Investment Group

Our views on this are the following: the FOMC entered September with financial markets melting down, awful global economic and financial sentiment, widening spreads, a soaring dollar, and lost its nerve. Since then, credit spreads have moderated, the dollar has moved sideways within its range, and there have been notable bounces in a number of hard commodities. Further, there’s been additional easing in China and Europe, and financial markets all over the world have stabilized. This statement was an attempt to walk back the aggressive language which the market gauged so dovishly.

Barclays chief U.S. economist Michael Gapen and Rob Martin

In the event, we see this month’s statement as an active effort on the part of the committee to leave the door open to December. Over the past few weeks, the market-implied probability of a December rate hike moved lower, despite many FOMC members' giving speeches in which they explicitly indicated that a December hike was likely. The FOMC likely believed that it needed a strong signal in the October statement if it was to keep any possibility of raising rates in December. In this vein, we view this statement as increasing the probability of December liftoff; however, we continue to see 2016 liftoff as more likely than 2015. We expect the softening of inflation toward year-end to keep the committee on hold this year. The data over the next two months, especially on inflation and employment, will be critical for determining the timing of liftoff and whether December liftoff is possible. We maintain our March 2016 call.

RHB Securities chief G3 economist Thomas Lam

The two most notable updates in the October statement, in our judgment, are in the second and third paragraphs, basically in the risk assessment and forward guidance sections.  Specifically, on the forward guidance, the FOMC shifted the emphasis by noting that “in determining whether it will be appropriate to raise the target range at its next meeting…”, compared to the sentence at the September meeting, which stated that “in determining how long to maintain this target range…”.  And, on the risk assessment, the FOMC dropped the September reference on global considerations, which alluded to “recent global economic and financial developments may restrain economic activity somewhat…likely to put further downward pressure on inflation…”, in the October statement, essentially diluting it to “monitoring global economic and financial developments”, while reiterating that the “risks to the outlook…as nearly balanced”.  Arguably, the shift in the guidance was probably intended to dissuade one-sided bets on the December meeting, and the reduced emphasis on global developments might be one way to simplify the list of considerations in the liftoff equation, refocusing the debate mainly on domestic considerations. 

Renaissance Macro head of U.S. economics Neil Dutta

The tone of the October FOMC statement was hawkish relative to market expectations. There is no indication that the Fed’s response function has changed. December is not a slam dunk. The Fed remains data dependent. That means an improvement in the labor market, a continued slide in the unemployment rate and stable financial market conditions, the Fed will be highly likely to raise rates at their December meeting.

BMO Capital Markets deputy chief economist Michael Gregory

Very importantly, the DEFCON about “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” was lowered. Indeed, it was replaced by the Committee “is monitoring developments abroad.” No doubt the Fed’s immediate concerns have been mollified by the policy responses we’ve seen overseas. No doubt Congressional leaders and the Administration agreeing on a budget deal eased the Fed’s worries too.

JPMorgan Chase director of global economics David Hensley

What was to be a somewhat sleepy, noncommittal FOMC statement turned out to be a bit more interesting and, on balance, more hawkish. If nothing else, it reminded markets that there still is a risk of a Fed that starts its rate hiking in December….While remaining noncommittal (as it must), the Fed has introduced language to more strongly emphasize its long-held view that 1) it is data dependent and 2) every meeting is live for a potential rate hike (in this case: December). Not surprisingly, markets are taking notice.

UBS deputy U.S. chief economist Drew Matus

The statement noted that spending and investment "have been increasing at solid rates" versus "moderately" at the September meeting. Additionally, and perhaps more importantly, the statement upgraded the economic outlook and omitted the worries about foreign developments restraining activity and putting downward pressure on inflation…We continue to expect a rate hike at the December FOMC.

Deutsche Bank chief U.S. economist Joseph LaVorgna

Additionally, the Fed tweaked the September sentence that read “The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad” to “The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments.” Notice the phrase “global economic and financial developments” replaced “developments abroad” at the end of the sentence. We may be splitting hairs on this one, but the fact is that we cannot help but come away thinking that Fed policymakers are a lot less worried about the financial market price action than was the case last month. The key issue is whether the Fed’s newfound hawkishness will be validated by the economic data or by a reappraisal of the financial markets regarding the possibility of a December interest rate hike.

Credit Suisse global interest rate strategist Helen Haworth

Beyond a modest acknowledgement of slowing in the pace of job gains, the assessment of the domestic economy was generally consistent or decidedly upgraded from September…With recent developments from the ECB, followed this week by the Fed, the divergence theme is very much alive. At a macro level, this introduces a range of complicated dynamics, with the obvious tension that we think the EUR front end is cheap for what we believe the ECB is trying to achieve and the USD front end expensive for the Fed's intentions. For the FX market, the read-across to a stronger dollar is straightforward, but for rates, the speed of that move could quickly end up complicating the market's response to new data.

TD head of global macro strategy David Tulk

The big surprise arrived later in the statement where instead of determining ‘how long’ to maintain the current stance for policy, the Fed revealed their clear desire to want to hike by saying that it would be addressed at its next meeting. The evolution of the data and financial conditions relative to its objectives will be the ultimate determinant for action. While the Fed continues to look for ‘some further’ improvement in the labour market and evidence of a firming in underlying inflation, but there is a greater sense of immediacy than before. While we remain of the view that the data flow will keep the Fed sidelined until March 2016, the market will need to treat every meeting between now and then as a coin toss.

Scotiabank chief economist Derek Holt

The Fed kept December on the table as a potential date for an initial rate increase — not that it should be news. Is the Fed serious about raising the rate in 2015? Today’s statement said overtly that the Fed will discuss changing the Fed Funds rate at its next meeting. The language reads: “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress — both realized and expected — toward its objectives of maximum employment and 2 percent inflation.” This shouldn’t be news insofar as senior Fed figures, including the chair, have discussed this possibility for months.

CIBC World Markets senior economist Andrew Grantham

The Fed is still looking to see “some” further improvement in the labour market and “reasonable” confidence that inflation is moving back to target before it starts raising rates. So today’s statement has left the door still open for a December move, but that remains dependent on incoming data starting with GDP tomorrow and then payrolls next week.

Moody's Investors Service

We still expect rates to rise, gradually, beginning in the next few months, but we do not expect immediate, direct credit implications for debt that we rate, including debt of rated financial institutions, non-financial corporates, the US government, municipals, and utilities and structured finance instruments. Rates will still be historically low and the pace of tightening gradual. Our Global Macro Outlook calls for the federal funds rate to increase by 150-200 basis points over the next two years, half the pace of increases during the last tightening cycle in the mid-2000s.

Société Générale chief U.S. economist Aneta Markowska

The Fed’s message to market participants today was clear: do not discount the possibility of a December liftoff. It did not, however, indicate that it is certain or even likely. “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress – both realized and expected – toward its objectives of maximum employment and 2 percent inflation.” In other words, the outcome remains very much data-dependent. The specific reference to the next meeting was notable and represents a subtle attempt to gently push up the market-implied probability of a December liftoff without tightening broader financial conditions. This was a clever move, but its success is yet to be determined.

ANZ Research analyst Dylan Eades and senior economist Tom Kenny

Admittedly, attempting to gauge the impact of potential policy easing by the ECB and recent interest rate cuts by the PBoC on the Fed’s reaction function is more difficult. However, the language in the statement suggests that any concerns that Fed has in regards to a stronger USD, have been offset by reduced financial market volatility and the prospect that policy easing in the above economies may act to boost global demand. In short, if US dataflow remains solid and the global backdrop doesn’t deteriorate then this will likely provide the FOMC policymakers with sufficient confidence to hike rates in December. Importantly, Fed Chair Yellen will have a further opportunity to massage market expectations closer to the next meeting with speeches scheduled in early December.

Aberdeen Asset Management senior fixed income specialist Patrick Maldari

This statement is clearly focusing more on the unemployment rate as opposed to the pace of job creation, which was clearly weaker.  The unemployment rate has dropped from 5.7% to 5.1% but the pace of jobs created has slowed markedly from a pace of 205,000 for the first eight months of the year to 139,000 for the two months ending in September. In addition many other indicators such consumer confidence, inflation, and manufacturing have clearly been disappointing. Despite the statement by the FOMC the most recent trend of economic activity has clearly slowed from the pace of the second quarter. We believe that this slowdown will convince the FOMC once again to delay rate hikes even though they have implied that a December rate hike is more likely at this point.

IHS Global Insights U.S. economists Ozlem Yaylaci and Patrick Newport

The statement was tweaked to reflect recent weak employment numbers, as it said “the pace of job gains slowed and the unemployment rate held steady,” after the prior month's statement said that labor markets "continued to improve." However, today's statement continued “Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year.” So overall, the committee did not seem worried about the recent slowdown in employment growth. Indeed, the committee repeated that it expects inflation to rise gradually toward 2% over the medium term, with the help of further labor market improvements.

Mizuho interest rate strategist Antoine Bouvet

Three main takeaways from the FOMC statements: the committee cites December as a possible date for raising rates,  it downgraded its job market assessment and it removed a reference to downside risks to inflation coming from global economic and financial developments. Hawkish on balance but the FOMC is only consistent with itself in flagging December and more weakness in the job market would be a clear reason not to hike.

London Capital Group analyst Ipek Ozkardeskaya

How happy for the FOMC, they could get over the recent concerns on the global economic slowdown…Despite the misplaced cheerfulness from the Fed, the feasibility of a December rate hike should be questioned. Could the Fed realistically close its eyes before the rout in the emerging economies as well as the energy and commodity markets? Isn’t the Fed’s manoeuvre margin too tight to make a mistake on the timing of its policy normalisation? Will a December hike be a contaminated by political issues, as the US walks into the critical election year?

Market-based expectations for a rate rise in 2015 now stand at 46 percent, up from 34 percent before the release of yesterday's statement. 

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