Wall Street Sounds Off on the End of Zero Interest Rate Policy
Following the Federal Reserve's historic decision to end years of zero interest rates, there is no shortage of reaction from analysts and economists across Wall Street. Here's a quick look at what they think about the central bank hiking for the first time in nearly a decade.
David Zervos, chief market strategist at Jefferies:
"[T]he initial market reaction to the first FED rate rise in 9 years appears to be about as exciting as the necklace Janet chose for today's press conference. That said, the 1 percent+ move in spoos to the UPSIDE should send a strong signal to the haters—QE works AND QE can be unwound! This rate move is a knife in the heart to the highly popular hater led idea that even a microcosmic removal of accommodation would send our economy crashing like a house of cards. ...
"Looking ahead, I personally believe this rate rise lifts a huge burden from the market. We have argued for many months now that liftoff would feel like a Y2K moment. And we even argued back in September that a failure to resolve liftoff uncertainty, along with a failure to focus on the economic successes of QE, drove the highly negative market response to the September decision. Today Janet started her press conference by touting the major accomplishments of QE—in particular the sizable drops in both the U3 and U6 unemployment rates. She was upbeat and confident. And in sharp contrast to September she dismissed any idea that HY, EM, or commodities were going to drag the U.S. economy down."
Neil Dutta, head of U.S. economics at Renaissance Macro Research:
"The Fed did the expected today, but has clearly put the incoming economic data and inflation in the driver’s seat in determining the path of future rate hikes. In the growth assessment, the Fed upgraded its language on the labor market but downgraded its language on inflation expectations, noting the survey-based measures have 'edged down' from 'stable.' The Fed now views the risks to the outlook as 'balanced' from 'nearly balanced,' a stronger assessment when including domestic and international developments. Even after the first hike, the statement notes that policy is accommodative. In the fourth paragraph, they noted the 'timing and size of future adjustments'—that means they can go in greater than 25 basis points increment and at any meeting. They also expect 'gradual' increases—and gradual means more than what the market thinks."
Joe LaVorgna, chief U.S. economist at Deutsche Bank:
"In terms of the interest rate forecasts, the 2017 (-25 basis points to 2.38 percent) and 2018 (-12.5 bps to 3.25 percent) median dots came down slightly. However, the longer-term neutral rate was unchanged at 3.5 percent. Also, the Fed stated it would keep reinvesting its balance sheet until 'normalization … is well underway.' This tells us that reinvestment is going to continue at least through next year. Similar to the Oct. 27-28 meeting statement, the December post-meeting communiqué struck an upbeat tone with respect to the economic outlook. For example, the December statement repeated that household and business spending 'have been increasing at solid rates' while the labor market has improved further. The inflation language noted that market-based measures 'remain low' and survey-based measures 'edged down'. This latter is important because it tells us the Fed is slightly more concerned about inflation expectations. While the Committee continues to 'take into account domestic and international developments', it now views the risks to the outlook for economic activity and the labor market as 'balanced' versus 'nearly balanced' in the October meeting statement. This paves the way for further rate hikes in 2016, economic and financial conditions permitting. To be sure, the meeting statement stressed that the Fed expects the pace of rate hikes to be 'gradual'."
Kit Juckes, global strategist at Société Générale:
"The Fed’s ‘dot-path’ is a little more compressed than it was but it hasn’t come down to any significant degree. The long-run rate projection too, has not come down. The dovish bias, therefore, is entirely in the text of the Statement and was supported by the tone of Fed Chair Yellen’s Press Conference … given a Fed forecast of unemployment bottoming out soon, I’d also guess that a continuation of the 204,000 rate of Non-Farm Payroll gains of the last five years will take unemployment lower, faster and make the market move towards the pace of hikes that is implied by the dots. That will/should support the dollar over time. EUR/USD will get to parity, just not yet. ..."
Drew Matus, deputy U.S. chief economist at UBS:
"With the rate hike now behind us the market will shift to focus on three key questions: First, can the Fed make this rate hike 'stick' using the tools they currently have. Second, how fast will the Fed keep moving? And, third, what will they do with the enlarged balance sheet? ... The statement suggested a committee with solidified views: risks are 'balanced,' instead of 'nearly balanced' and inflation is expected to rise 'to,' not 'toward,' two percent. Despite this confidence, as we expected, the Fed stressed that further hikes were likely to be gradual but are data dependent.
Rick Rieder, chief investment officer of fundamental fixed income at BlackRock:
"Finally, after some false starts, the Fed has begun the process of normalizing interest rates, which has a tremendously symbolic importance as a capstone to recovery, but less of an influence on actual economic growth. That is partly because, in waiting so long, the Fed has allowed the economic cycle to crest as it heads into the rate hiking cycle, which will present a dilemma for the central bank in the year ahead. Further, regional policy divergence, slow emerging markets growth, and global liquidity risks are likely to keep market volatility higher, which will make effectively navigating this low-return world a continued challenge."
Chris Gaffney, president at EverBank World Markets in St. Louis:
"The indications from this is that the global economy is doing well enough for the Fed to go ahead and start moving interest rates higher, and that means inflation may be coming back and that's what's going to drive the metals market."
Peter Boockvar, chief market analyst at the Lindsey Group:
"The question now is whether these new tools work in getting the fed funds rate up by 25 basis points and what distortions this now causes in short term money markets. The money market money that goes into the new RRP [reverse repurchase agreements] is money that won’t go into the commercial paper market as an example. The press conference will be helpful in gauging how tight or not the FOMC finger is on the trigger of another hike. I still think we’ve just seen the only rate hike we’ll get in this recovery and the next one won’t come until during the expansion after the next recession. To the dot plot, the consensus is still at a 1.375 percent fed funds rate by the end of 2016 but 2017 was revised slightly lower. I think its worthless to look at the 2017 dots and the same can be said for 2016 because the crystal ball right now is very foggy."
Michel Gapen and Rob Martin, U.S. economists at Barclays:
"The decision was largely expected by markets and telegraphed by the Fed in recent weeks. Therefore, we expect markets to focus on forward-looking matters, including the anticipated pace of tightening, the updated set of economic projections, and the overall tone of today’s communications. While much of this messaging will come in the press conference to follow, the statement does speak to the committee’s expectation that the rate hike path will be gradual."
Brian Martin and Tom Kenny, economists at ANZ Research:
"The statement clearly pointed out that the decision to raise interest rates today reflected the fact that it takes time for monetary policy to feed through to the economy. It stresses that policy is still accommodative and will support further improvement in economic activity. Based on the forecasts that the FOMC provided with real GDP above trend until 2018, that implies that the rate cycle, although gradual, will probably be persistent. Certainly, there is something of a tension between the way markets are currently interpreting the word ‘gradual’, with the U.S. yield curve implying a Fed funds rate well below the Fed’s forecast over the next few years, and what the Fed is signaling through its forecasts. … The market response thus far would likely make the Fed comfortable with its communication strategy. After initial gains, the USD is now weaker against most currencies compared with pre-hike levels, and long term bond yields are lower."
Michael Gregory, deputy chief economist and head of U.S. economics at Bank of Montreal:
"As we anticipated, the decision to raise rates will be unanimous. No doubt the elevation of inflation (under)performance in determining the rate hike cadence helped the doves go along with this decision. Elsewhere in the Statement, one gets the sense that the Fed is content with the cumulative progress in the labor market. 'A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year.' And, later, 'the Committee judges that there has been considerable improvement in labor market conditions this year.' …”
Megan Greene, chief economist at Manulife Asset Management:
"Break out the champagne! The U.S. economy is finally strong enough for the Federal Reserve to start normalizing monetary policy! Or is it? There are a number of reasons the Fed has finally decided (unanimously!) to hike the Fed Funds rate for the first time in nine years, and some of them are even good ones. For those who thought that liftoff would mean no more Fed obsessing though, think again. Now that the Fed has started a rate hiking cycle, there are two major things to watch. First, there is a risk to the Fed’s credibility if the New York Fed’s Open Markets desk fails to successfully implement the rate hike and manage the Fed Funds rate higher. Second, the most important aspect of Janet Yellen’s press conference following the FOMC meeting was her messaging on the rate path going forward. We think her emphasis on a gradual hiking cycle carries much more weight than the Fed dots, though the biggest risk to the US economy in 2016 remains a policy mistake by the Fed. The phrase 'Hurry up please it’s time' is uttered by a British bartender in TS Eliot’s 'The Wasteland' with increasing urgency as he tries to coerce his customers to go. Anyone watching the Fed over the past year could swear the English bartender was whispering the same phrase into the ears of the FOMC members."
Omar Sharif, rate sales strategist at SG Americas Securities:
"The Fed raised rates to between 0.25 percent and 0.50 percent, as widely expected, and emphasized the 'gradual' nature of future rate hikes (twice). Those hikes will depend on the incoming data, including a range of labor market measures, inflation and inflation expectations figures, and readings on financial and international developments. There was an added emphasis, in my opinion, on the inflation figures given the current shortfall. … Reinvestment will continue, and the Committee 'anticipates doing so until normalization of the level of the federal funds rate is well under way.'"
Ian Shepherdson, chief economist at Pantheon Macroeconomics:
"The statement said the path of policy normalization is expected to be 'gradual' and that policy right now is 'accommodative'; no surprises there. The trigger for action is the labor market, where slack has 'diminished appreciably' this year, boosting Fed confidence that 2 percent inflation will be reached in the medium-term. As a result, the risks to growth and inflation are now, finally, 'balanced'. The intention to tighten at a gradual pace comes with a warning—courtesy, presumably of Stan Fischer—that 'the actual path of the funds rate will depend on the economic outlook as informed by incoming data'. The last time the Fed stuck to a promise to take it easy—the 'measured' pace of tightening in 2004 to 2006, it ended badly, and we have no confidence that the serene glide path for the economy envisaged by the Fed and, especially, the markets, will be achieved this time either."