MarketWatch’s Rex Nutting and Bill Watts live-blogged the Fed decision and the press conference from Fed chief Janet Yellen.
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Summary: Fed spooked by global events
by Rex Nutting
The Federal Reserve thinks the U.S. economy is doing OK, but the global economy is a different matter. And that’s why the Fed held rates steady today.
If it were just a matter of looking at the U.S. jobs and inflation data, the Fed probably would have raised interest rates today. Fed Chairwoman Janet Yellen made it clear in her press conference that the labor market is close to full employment, and that she’s reasonably confident that the inflation rate will drift back up to around 2% eventually.
When asked specifically about the undershooting on inflation, Yellen said she and her colleagues aren’t too worried. Inflation will be very low this year, true, but it will inevitably accelerate next year as the labor market tightens further and the impact of a stronger dollar dissipates.
They could be wrong about inflation, of course, but for now Fed officials appear to be reasonably confident that disinflation won’t persist, and that means they’re still on course to raise rates this year.
More jobs and expectations of
slightly higher inflation were the preconditions for the first rate hike. So what happened?
Turmoil overseas, especially in China, where authorities seem to be bungling the soft landing that everyone assumed was coming.
Lower demand from China means falling prices and weaker growth in countries that produce raw materials, such as oil, metals and other commodities. In turn, the dollar has appreciated, bringing deflationary forces to the U.S. and weakening our competitiveness in exports, especially manufactured goods.
So far, Fed officials aren’t overly concerned about global developments. They are still confident that the troubles won’t change the trajectory of the U.S. economy too much.
In the grand scheme of things, it doesn’t matter too much if the Fed raises rates now or in October or December. But it’s possible that the global headwinds will grow. What if the dollar is even stronger in October? What if there’s more blowback in the U.S. stock market, or in the exchange rate of the dollar or if commodity prices melt down further?
Fed officials can’t say what they will do next until they see how economic and financial events unfold.
The unemployment rate and the inflation rate are no longer the triggers for Fed action. Instead, it’s the Shanghai market, the price of oil, the value of the dollar, and the stability of dozens of economies that will tell the Fed when it’s safe to raise rates.
Be prepared for more volatility, uncertainty and speculation.
Stocks see-saw
by William Watts
Stocks see-sawed in the wake of the Fed’s decision and through Yellen’s news conference, which just concluded.
After a push to the upside, stocks are again mixed, with the Dow slipping back into negative territory.
S&P 500 — flat at 1,995
DJIA — down 0.1% at 16,724
Nasdaq Composite — up 0.3%
The press conference is over.
Gold shines
by William Watts
Gold futures remain higher after the Fed stands pat, r.
She quotes Adam Koos, president of Libertas Wealth Management Group: “Since gold moves with such a strong, inverse relationship to interest rates, the 9-1 decision to let rates lie today was an obvious positive for the yellow metal.”
Fiscal policy
by Rex Nutting
The threat to shut down the government because of the budget impasse played “absolutely” no role in the Fed’s decision to hold rates steady, Yellen says.
But the Fed has had to bail out an unhelpful Congress frequently
over the past five years.
Fed serving the 1%?
by Rex Nutting
Do lower interest rates contribute to widening wealth inequality?
Short answer from Yellen: No.
Low rates have been great for those at the bottom: It reduces their debt service load and make it more likely they’ll get a job.
Not counting on housing
by Rex Nutting
The Fed is counting on the housing market to improve, but it’s not going to be a key driver for economic growth, Yellen says. “It plays a supporting role.” The gradual increase in interest rates that is expected shouldn’t derail the recovery in housing.
“We do our darnedest to pull together the best analysis we can,” Yellen says.
Negative interest rates
by Rex Nutting
Although one member of the Fed would like additional stimulus to the economy by moving interest rates into negative territory, it was “not something that we considered very seriously at all today,” Yellen said.
The negative dot on the dot plot was an outlier view.
S&P Breaks Key Interim High, But Not KEY Level
— RJO Futures (@rjofutures)
Zero forever?
by Rex Nutting
“I would be very surprised” if the Fed never escaped from zero interest rates, Yellen says.
That’s not that reassuring: The Fed has been very surprised quite frequently since 2007.
Fed not reacting to markets
by Rex Nutting
The Fed does not should not respond to the market’s ups and downs, Yellen says. But it’s impossible not to respond to developments that might affect the real economy.
The selloff in the stock market and the appreciation of the dollar “does represent some tightening of financial conditions,” akin to tighter monetary policy.
The FOMC statement & projections were dovish relative to Yellen’s opening statement was not so dovish.
— Greg Ip (@greg_ip)
A big "if"
by Rex Nutting
The Fed would like to have “a little more confidence” that it’s inflation target of 2% will be hit, Yellen says. The fact that unemployment rate has continued to decline “bolsters my confidence in inflation” because that has historically generated upward pressure on inflation.
But she is asked the tough question: Those historical correlations between unemployment and inflation have broken down. The Fed expects full employment for the next three years, but it also expects inflation to remain below 2% through 2018.
She says inflation should be closer to the 2% target next year and in 2017 after the temporary drag from a stronger dollar dissipates.
“If our understanding of the inflation process is correct,” she says, “we will see upward pressure on inflation.”
That’s a very big “if.”
Hold the statement, buy the presser.
— Eddy Elfenbein (@EddyElfenbein)
Question #1 for Janet Yellen has to be: “Which Fed forecaster is projection a negative Fed Funds rate through 2016 and why?”
— Edward Harrison (@edwardnh)
Hell no, we won't go
by Rex Nutting
Janet Yellen says she welcomes “advice” from everyone, including vocal protesters outside the Fed’s headquarters demanding that the Fed hold off raising rates until wages rise.
She agrees with them in part, she says.
“There are additional margins of slack, particularly relating to very high levels of part-time, involuntary employment. And labor force participation that suggests that at least to some extent the standard on employment rate understates the degree of slack in the labor market. But we are getting closer,” she says.
Stocks rally as Yellen speaks
by William Watts
Stock-market investors appear to like what Yellen has to say. Stocks are setting new intraday highs.
The Dow is now up around 175 points, or more than 1%, to 16,915
S&P 500 — up 1.2% at 2,018
Nasdaq Composite — up 1.4% at 4,955
October in play
by Rex Nutting
Markets seem to want certainty from the Fed about interest rates, but the Fed won’t be bullied into giving certain guidance about when it will raise rates. Financial conditions will be the most important factor in the timing of the first rate hike.
“I can’t give you a recipe,” Yellen says.
The first rate hike could come in October, Yellen says. If the Fed does hike in October, it would call a press conference afterward. Currently, there is no press conference scheduled for the Oct. 28 meeting.
VIX volatility gauge under pressure
by William Watts
The CBOE Volatility Index, or VIX, is down hard after the Fed stood pat.
It’s down 7.4% at 19.74 after dipping as low as 18.96. The VIX, which measures expectations for implied volatility for the S&P 500 over the next 30 days, had spiked amid market turmol in August and had remained elevated in the run-up to the Fed decision, holding above its long-term average of 20.
is getting SMOKED. It’s down 9%. And here’s the perfect image for what happened:
— StockTwits (@StockTwits)
Caution, but no big worries
by Rex Nutting
“The situation abroad bears close watching,” Yellen says.
Yes, markets have been paying pretty close attention to that.
However, “the U.S. economy is performing well,” and the Fed expects it to continue to do so, she says.
A majority of Fed members still expect to raise rates this year.
Treasurys the star of the show
by William Watts
Treasurys are the star of the show as the Yellen news conference gets under way. Yields continue to drop as Treasurys push to session highs.
The yield on the 2-year note is now down nearly 10 basis points at 0.718%
The 10-year yield is off more than 8 basis points at 2.211%
Low inflation
by Rex Nutting
Inflation will remain lower for longer, thanks to further declines in oil prices and the appreciation of the dollar.
“It will take a bit more time for these effects to fully dissipate,” Yellen says.
Inflation is currently running about 0.3% year-over-year, far below the Fed’s target of 2% per year.
Or was decision bad news for emerging-market economies?
EM/global demand rebalancing just became that much harder: China, Japan will have to go to the printing presses, ECB wont be able to abstain
— Lena Komileva (@komileva)
Global markets should rejoice: economist
by William Watts
Global markets will be thanking their lucky stars the Fed decided to hold fire, says Nina Skero, economist at the London-based Center for Economic and Business Research, in a note:
Since the onset of extraordinarily loose monetary policy in 2006, emerging markets around the world from Brazil to Indonesia have relied on cheap financing options to fuel their growth. If monetary policy was tightened right now, while numerous other sources of risk loom, various global economies could be left with an Uncle Sam-shaped hole in their wallets, as investors rush to acquire US dollars, prompting capital flight out of countries such as China. Furthermore, companies in many emerging countries have taken on substantial dollar-denominated debt which will become difficult to service following capital outflows and the subsequent local currency devaluation.
by Rex Nutting
Janet Yellen begins her press conference with a prepared statement, fleshing out the shorter statement from the committee.
She says the Fed still anticipates raising interest rates this year, despite recent uncertainty in global economies and financial markets. The turmoil could restrain the U.S. economy “somewhat.”
The Fed still expects moderate GDP growth, continued reduction in slack in the labor market and inflation remaining below target for the next several years. she says.
Fed lowers its long-run rate forecast — here is the full dot plot
— MarketWatch Economy (@MKTWeconomics)
Cheers from White House
The Fed clearly made the right decision-the economy is still strengthening and global challenges present a bigger risk than future inflation
— Betsey Stevenson (@BetseyStevenson)
Risk mood still 'OK'
by William Watts
In a note, Kit Juckes, currency strategist at Societe Generale, offers up a thumbnail analysis of the dollar reaction:
USD/JPY is down a bit but not a lot [because] risk mood is still OK. EUR/USD drivers are pointing up but how far that goes in a risk-OK mood and with Euro yields and short reates edging lower, dunno if we can really push far. EMFX is still selling dollars [because] it’s long dollars and has less reason to be so unless equities (US or China) melt.
Fed projections
to the Fed’s economic projections.
The Fed does a live transcript of the press conference
— MarketWatch Economy (@MKTWeconomics)
Market scorecard
by William Watts
It looks like China gave the Fed a fright, prompting the decision to leave rates on hold.
With Fed Chairwoman Janet Yellen set to take to the podium for her news conference in a few minutes, here’s the market breakdown so far:
Stocks have been whipsawed a bit, adding modestly to gains, then dipping lower, then pushing back toward the highs.
Treasury yields tumbled as bonds rallied. Note that bond investors had appeared to be positioned for a rate hike after earlier this week driving the two-year yield to its highest level since 2011.
The dollar, which has rallied since mid-2014 on expectations for monetary policy divergence between a tightening Fed and continued easing by the European Central Bank and the Bank of Japan, lost ground.
Yellen presser coming up
by Rex Nutting
Stay tuned!
Federal Reserve Chairwoman Janet Yellen will hold an hour-long press conference beginning at 2:30 p.m.
Someone submitted negative dots for 2015 and ;
— Matthew B (@boes_)
Looks like
is having a Dewey Defeats Truman moment with the Fed. h/t
— Harry Stein (@HarrySteinDC)
Dollar weakens
by William Watts
The Fed’s decision to remain on hold put pressure on the dollar, with the greenback sinking versus the euro, yen and other major rivals.
versus emerging-market currencies, reports MarketWatch’s Joseph Adinolfi.
To those saying that this Fed statement is surprisingly dovish (, ), I just don’t see it. Liftoff is coming. Not yet
— Justin Wolfers (@JustinWolfers)
Full story here
to MarketWatch Fed reporter Greg Robb’s full story on the Fed statement.
Unchanged is basically like QE4. Look at bonds right now.
— Downtown Josh Brown (@ReformedBroker)
Economy's speed limit lowered
by Rex Nutting
The Federal Reserve has lowered its estimate of the economy’s potential growth rate.
In the latest projections, the members of the Fed said the economy can grow at 1.8% to 2.2% over the long term, down from a central tendency estimate of 2% to 2.3% in the June forecasts.
The lower growth potential is a function of slowing in the growth of the labor force in years to come, as well as a recognition that productivity increases have softened considerably.
A slower potential growth rate means the economy has less slack than the Fed thought a few months ago. At the same time, the Fed lowered its estimate of “full employment” to 4.9%-5.2% from 5%-5.2%.
Dovish relative to previous & dots are down. But mkt was positioned dovishly. uncertainty may be the lasting legacy.
— kit juckes (@kitjuckes)
Treasury yields extend fall
by William Watts
Treasury yields
e after the Fed decision. Yields fall as bond prices rise:
2-year yield down 6.5 basis points at 0.746%
10-year yield down 6 basis points at 2.238%
Lower terminal rate
by Steve Goldstein
The Federal Reserve
lowered its interest-rate forecast for the longer run, a crucial statement that says the U.S. economy is getting less capable of withstanding monetary policy tightening. The median of the Fed’s long-term forecast was lowered to 3.5% from 3.8% in June.
Stocks turn lower as Fed holds fire
by William Watts
Stocks added modestly to small gains after the Fed hold fire, but soon.
S&P 500 — down 0.2% at 1,9993
down 0.2% at 16,705
Nasdaq — down 0.1% at 4,887
It's the global economy
by Rex Nutting
It looks like uncertainty in the global economy may have been the decisive factor in today’s decision to leave rates steady.
From the statement: “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 Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad.”
Text of statement
Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector
however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation comp survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. 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. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. 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. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, C William C. Dudley, Vice C Lael B Charles L. E Stanley F Dennis P. L Jerome H. P Daniel K. T and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.
Rates steady
by Rex Nutting
The Fed has voted 9-1 to hold interest rates steady.
by Rex Nutting
Coming up at 2 p.m.: The statement from the Federal Open Market Committee announcing its decision on interest rates. Also, the Fed will release updated forecasts for growth, inflation, employment and interest rates from the Fed members.
At 2:30 p.m., Fed Chairwoman Janet Yellen will hold a press conference.
Stocks hold modest gains, Treasury yields down
by William Watts
With the announcement of the Fed’s decision roughly 5 minutes away, stocks are holding on to modest gains:
S&P 500 — up 0.3% at 2,002
DJIA — up 0.3% at 16,791
Nasdaq Composite — up 0.4% at 4,908
The 2-year Tresaury yield is off around 6 basis points at 0.75%
The 10-year note yield is down around 4 basis points at 2.256%
35% of readers think the market will meltdown if the Fed delivers a rate hike. Vote here to tell us what you think:
— MarketWatch (@MarketWatch)
by Rex Nutting
The last time the Fed met, on July 29, the committee gave this guidance about when it would be appropriate to raise interest rates:
“The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
So the question for the Fed is: Has it seen “some further improvement” in the job market? And is it “reasonably confident” that inflation will hit 2% anytime soon?
Bill Gross: Bigger fish to fry than rate hike
by William Watts
While bond guru Jeffrey Gundlach thinks a Fed hike would “blindside” the market, another closely followed bond maven–Janus Capital’s Bill Gross–has been pining for the Fed to get off of zero.
Gross: Focus on growth, not a 25 basis point Fed move. Nominal GDP at 3.5% does not support profit growth or interest cover.
— Janus Capital (@JanusCapital)
Jeffrey Gundlach: Fed will ‘blindside the market’ if it hikes interest rates
— William Watts (@wlwatts)
Markets are pricing in roughly a one-in-four chance the Fed will lift interest rates today:
— MarketWatch (@MarketWatch)
Markets are pricing in roughly a one-in-four chance the Fed will lift interest rates today.
This is thet against a rate hike. Summers was nearly the chairman of the Fed.
the last time the Fed hiked
Some pregame reading: An argumentwould welcome a hike.
Here’s what a has to say about today.
This is a list of from a hike.
The video will start about five minutes before the Fed decision. Then the press conference will be carried in its entirety.
First things first — when is the Fed decision? – and the latest economic projections and rate forecasts — come out at 2 p.m. Eastern. The press conference starts at 2:30 p.m.
by Steve Goldstein
Good afternoon. The market’s dead, but anticipation is growing… will we see the first interest rate hike in nine years?
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