NEW YORK (Reuters) - The Federal Reserve raised interest rates on Wednesday and forecast at least two more hikes for 2018, signalling growing confidence U.S. tax cuts and government spending will boost the economy and inflation and lead to more aggressive future tightening.
Policymakers predicted rates would rise three times next year and two times in 2020, a further indication of confidence in the economy.
COMMENTS:
PRAVEEN KORAPATY, GLOBAL HEAD OF INTEREST RATE STRATEGY, CREDIT SUISSE IN NEW YORK:
"It was a little more dovish than our economists were expecting. But I would say overall if I looked at it separate from expectations, I would say on course - not too hawkish, not too dovish.
"We continue to think they're on the path for four hikes this year even though the median dots didn't move. I think we were one dot away from the median for 2018 moving up to four hikes. So I think four hikes should be people's' base case."
JUAN PEREZ, SENIOR FX TRADER AND STRATEGIST, TEMPUS CONSULTING, WASHINGTON:
"The most important thing is the Fed sticking to its original plan of three rate hikes. Anymore would be too much. Any faster increases in borrowing costs could affect the economy. I think we are pretty good where we are in terms of the current pace of rate hikes. There was some thinking we could see up to four (hikes). The other thing is that the economic outlook has strengthened and that's a good thing. It's very consistent with what Powell told Congress. They do think the economy is strong enough for further increases in borrowing costs."
KATHY JONES, CHIEF FIXED INCOME STRATEGIST, SCHWAB CENTER FOR FINANCIAL RESEARCH
"I though it leaned a little bit towards the hawkish side. One more dot shift and we would have gotten the expectation for four rate hikes this year, so they were pretty close to moving in that direction."
"They upgraded their assessment of the economy, which I think is significant. I think that's an indication that they're taking into consideration tax cuts and spending increases."
"All that suggests to me that they're leaning a little bit hawkish. I'm surprised that the market has not responded to that, but I suppose that suggests there was a feeling this was already discounted by the market."
JEFF CARBONE, MANAGING PARTNER, CORNERSTONE WEALTH, HUNTERSVILLE, NORTH CAROLINA:
"The rate hike is no surprise. It was really reassurance about the amount of rate hikes we will get for 2018. There was no change there. That's the big thing we were looking for…Inflation is still not a concern for them. There are positives with unemployment continuing to decrease. There was reassurance that the economy is strong. We may be in the later part of the business cycle, but it's the early late stage of the business cycle. It still means there's definitely more room for the market to run."
FRITZ FOLTS, CHIEF INVESTMENT STRATEGIST, 3EDGE ASSET MANAGEMENT LP IN BOSTON:
"Right now the equity markets are holding their break and however they read the tea leaves coming out of this press conference is, at least in the short term, going to be very influential. I don't see how you could say the Fed isn't (a risk). The Fed could certainly be a risk, and I don't think you can discount that. The problem is you have someone who's an unknown. We haven't had three press conferences with him and we don't know how to interpret what he says."
"We were comfortable not being as aggressive on equities going into this meeting because it could push markets one direction or the other."
LINDSEY BELL, INVESTMENT STRATEGIST AT CFRA RESEARCH:
"There weren't really any surprises out of the press release, which is a good thing, and that's why the market has reacted positively. The Fed is still expecting three rate hikes this year. They did hike 2019 by one and 2020 by two more. I think that was expected by the market.
"Going into the press conference, they've raised economic growth expectations and lowered unemployment, but inflation was little changed. So we'll need a bit more explanation on that because you'd expect to see inflation moving up a bit higher in that type of environment."
JIM PAULSEN, CHIEF INVESTMENT STRATEGIST, THE LEUTHOLD GROUP, MINNEAPOLIS
"That's a Fed that really feels good about the economy, not only this year but into next year. That came through in rate hikes they put into play in 2019 and 2020. And they were only one vote away from a fourth rate hike in 2018. That tells you four hikes is very much on the table for 2018."
"The initial response by equities was to go up because of the confidence the Fed seems to have in the economy. But with bond yields going up in anticipation of more hikes in coming, that kind of scared the stock market again."
"That's the struggle the market is in. Good growth in the economy also probably means higher inflation and higher yields. The market today is a microcosm of this year. It's going nowhere fast. It goes up on good economic news it goes down on higher rate news."
RICK MECKLER, PRESIDENT, LIBERTYVIEW CAPITAL MANAGEMENT IN JERSEY CITY, NEW JERSEY
"Certainly there was no surprise in terms of the actual hike. The positive for the market is that the focus on future rate hikes seems more due to a Fed view of a better economy than necessarily inflation prevention. If the economy can grow with moderate inflation, that is certainly the ideal situation for stocks."
"That said, we are going to be continuing to see rate increases this year and it looks like next as well and that does provide more competition for equities. So I think it will be a struggle for the market to go up at the rate it has been as investors try and balance the strength of the economy with the opportunity to invest in fixed income at higher rates."
MARKET REACTION:
STOCKS: U.S. stocks extended gains, and were last up 0.7 percent. BONDS: U.S. bond yields dipped, then rose. FOREX: The dollar index <.DXY> hit a session low.
(Americas Economics and Markets Desk; +1-646 223-6300)
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