(Reuters) - The U.S. Federal Reserve kept interest rates unchanged on Thursday in a nod to concerns about a weak world economy, but left open the possibility of a modest policy tightening later this year.
STORY: TEXT:
KEY POINTS:
* In what amounted to a tactical retreat, the U.S. central bank said an array of global risks and other factors had convinced it to delay what would have been the first rate hike in nearly a decade.
* "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 Fed said in its policy statement following the end of a two-day meeting. It added the risks to the U.S. economy remained nearly balanced but that it was "monitoring developments abroad."
COMMENTS:
RYAN LARSON, HEAD OF U.S. EQUITY TRADING AT RBC GLOBAL ASSET MANAGEMENT IN CHICAGO:
"Most people won't know what to say! The only thing with them not doing it at the September it continues to the present with uncertainty between now and December, if they do December at all. Obviously, with everything that's going on overseas in terms of China and emerging markets, the market here in the U.S. maybe wondering what the Fed that they're communicating in terms of the implications from developments in China or emerging markets and how that deters our outlook going forward.
"Again, it presents further uncertainty. From that standpoint, it's almost like we're going to be stuck in this range until December because most likely they're not going to do their first rate hike in roughly 10 years at a meeting where there's no press conference, so that puts December front and centre. Our bet was on December, but it would have been nice to see Yellen come out and just do this and get this out of the way in September, let the market deal with it a couple of days, and then slowly realize what the Fed is doing is for the right reasons. Now it's capping us with uncertainties in the marketplace at least for the next couple of months."
DAVE MACEWEN, CO-CHIEF INVESTMENT OFFICER, AMERICAN CENTURY INVESTMENTS IN KANSAS CITY, MISSOURI, $145.8 BILLION IN ASSETS UNDER MANAGEMENT:
"I think the Fed, through their inaction is creating quite a bit of uncertainty in the market when the Fed is the central thing that everyone in the market is talking about and there is a perceived risk of them nudging up rights. You have people like Lawrence Summers out there saying the world is going to end when they start to raise rates. It creates a lot of uncertainty. I think the economy can clearly withstand some tightening and I think they should just get on with it."
JINWEN ZHANG, EXECUTIVE VICE PRESIDENT, THOMAS WHITE INTERNATIONAL, CHICAGO:
"They're looking at financial conditions in the market and what has happened over the last few months. The turmoil in emerging markets, for example.
"It's possible it will happen in December. What happens in the next few months will be the determining factor for a December decision. It likely won't be in October. Overall weakness in overall growth is part of the reason and the slowdown in China and decreasing in commodity prices are already affecting things. They can't get away from emerging markets and the global environment, they can't avoid it."
URI LANDESMAN, PRESIDENT, PLATINUM PARTNERS, NEW YORK
"The decision will be taken positively by the market. This is still a 'what you focus on' situation. I'm a growth guy and to me this suggests that the economy isn't growing. I would expect the market to rally on this. I think any month now is a possibility. Unless the data turns down they will do it before the end of the year. They don't want to risk the economy not being completely solid."
BRUCE BITTLES, CHIEF INVESTMENT STRATEGIST AT MILWAUKEE-BASED BROKERAGE AND RESEARCH FIRM ROBERT W. BAIRD & CO:
"Now we've got to look forward to the next employment report and if it's strong it will create a lot more anxiety about a rate hike in October or December. I'm not so sure that this is the best thing that could have happened. I think we'll be in a trading range and stay there.
"The risk is if the labour market really starts to heat up and wages rise. Then we will have a much tougher decision to make."
SCOTT WREN, SENIOR GLOBAL STRATEGIST FOR WELLS FARGO INVESTMENT INSTITUTE IN ST. LOUIS, MISSOURI:
"If you look at the statement, the section that caught my eye was where it says when they see further improvement in the labour market and it is reasonably confident inflation will move back to its two percent objective.
"I tell you, if you look at core PCE at up 1.2 percent year over year, that is miles and miles and miles away from 2 percent - it's a long way. We would argue the labour market is not tight, whatever full employment rate is, it's not 5.1 percent, I don't know what it is. When you look at wage growth not hardly doing anything, when you look at almost 10.5 percent of the working population is either unemployed or underemployed, that is why wages aren't going up. The labour market is not tight, inflation is nowhere near their target, it totally doesn't surprise me they didn't do that. Saying that, they almost backed themselves into a corner here, our call is they do make one move this year, it is going to be in December. It is going to be a 25 basis point move and it's basically a credibility, 'let's get the normalization ball rolling' here.
"When I read this statement, this is a dovish statement. I am a little surprised really that the S&P isn't higher. I think the market still feels pretty good that we are going to see something in December and that is probably taking some of the edge off. If they are going to move in December, if they were going to start dropping hints today, and (Fed Chair Janet Yellen) might during the press conference. But I thought we would see something in writing as well and I don't see it in here. That is unfortunate because this is not too far in advance, because if they are going to move in December, they need to start telling people pretty soon here, get on the same page and hammer it home."
STEVE GUTCH, SENIOR PORTFOLIO MANAGER, FEDERATED INVESTORS, ROCHESTER, NEW YORK:
"There was just too much global uncertainty right now, and the risk of raising rates from zero is different from raising rates if you're at 4 percent. In our view, they are going to wait until it's essentially crystal clear before they raise rates.
"Now it's a waiting game. In our view, we don't think this is material, and I would expect a volatile market to continue.
"The market sold off a little bit but you had a lot of interest-rate sensitive stocks that were appreciating quite well today, so somebody was putting a trade on that they were going to raise rates."
OMER ESINER, CHIEF MARKET STRATEGIST AT COMMONWEALTH FOREIGN EXCHANGE INC. IN WASHINGTON:
"I can't say it was a major surprise that the Fed did not move. I am a little surprised at the dovishness of the statement. I would have expected 'no move' to be accompanied by a slightly more upbeat assessment of the economy. Instead, what we got was more focus on macroeconomic uncertainties, and that was a little bit of a surprise."
HUGH MCGUIRK, HEAD OF MUNICIPAL BONDS TEAM, T. ROWE PRICE, BALTIMORE, MARYLAND:
"I'm a little disappointed. We've got to rip the Band-Aid off. Clearly they're being very cautious, as they have been all along. We'll just have to wait until October."
GENE MCGILLIAN, SENIOR ANALYST, TRADITION ENERGY IN STAMFORD, CONNECTICUT:
"It will probably be neutral for oil, although maybe you could say it will weaken the dollar and that would be supportive to oil.
"But we've been at this level so long and this just moves the Federal Reserve watch to the next meeting. The oil market will go back to watching to see if the economic slowdown in China spreads to other economies and whether low oil prices start to lower U.S. oil production significantly."
BOB MICHELE, GLOBAL CHIEF INVESTMENT OFFICER, HEAD OF GLOBAL FIXED INCOME, JPMORGAN ASSET MANAGEMENT IN NEW YORK, $500 BILLION IN ASSETS UNDER MANAGEMENT:
"I am not surprised. I would have been shocked if the Fed raised rates because the market wasn't at all prepared for it. It's the first rate hike in nine years, they have to be careful. Do I think they should have raised rates? Yes I think they have had the opportunity, but they clearly decided that the international economic conditions warranted waiting for a while. I think they could have stuck to their guns. I think they need to get off the zero lower bound."
BRIAN DOLAN, HEAD MARKET STRATEGIST, DRIVEWEALTH, NEW JERSEY:
"The Fed did the right thing. There's no need to rock the boat right now. Again the disconcerting element is the downgrade to the interest rate trajectory, which could provide solace to investor sentiment overall. Given the global headwinds, the last thing we need right now was a hike in rates and any kind of hawkish projections."
MARKET REACTION:
STOCKS: U.S. stock indexes rose initially, then slippedBONDS: U.S. bond prices extended gainsFOREX: The dollar hit session lows against the euro and fell against the yen
(Americas Economics and Markets Desk; +1-646 223-6300)
