Ed. Note: This article first appeared in Business Insider
The Federal Reserve hiked interest rates on Wednesday, raising its target federal funds rate by 25 basis points to a range of 0.75% to 1.0%.
The rate hike is seen as a vote of confidence in the US economy, which has witnessed increasing inflation and job growth.
All of the members of the Federal Open Market Committee except for the Minneapolis Fed governor, Neel Kashkari, voted in favor of a rate hike.
Here’s a roundup of reactions from Wall Street firms following Wednesday’s decision.
Societe Generale, Albert Edwards
“So finally the Fed has got its ‘a’ into ‘g’ and raised rates. Although this will be the first of many rate rises in a move to normalise rates, the Fed’s lack of verbal assertiveness means the market still cannot bring itself to believe the Fed’s own projections for interest rate hikes.”
Goldman Sachs, Richard Ramsden
“The Fed hiked the fed funds rate by 25 bps on March 15, while language around risks was modestly upgraded. Notably, the Summary of Economic Projections (SEP) still suggests a total of three (i.e., two additional) hikes this year — which implies modest upside to our ’17/’18 EPS estimates.
While the statement was largely as expected, stocks sold off on what appears to be positioning-related factors. We think that, from here, investors are trying to frame
(1) potential upside from faster/more than expected hikes against eventually inflecting deposit betas and
(2) to what extent rates will help to offset some of the recent weakness in loan growth.
In our coverage, we see most absolute earnings upside from higher short rates in CMA, SCHW, ZION, and BAC.”
JPMorgan, Michael Feroli
“As widely expected, today the Fed raised the target fed funds range by 25 basis points to 0.75-1.0%. The FOMC’s interest rate forecast ‘dots’ pointed to unchanged guidance on their expectations of three hikes this year followed by another three hikes next year.
They continue to see the neutral rate at around 3.0%. The dot plot came in at the dovish end of the range of outcomes, particularly since the tone of Fed-speak has become more optimistic since early December.”
Mizuho Securities, Steven Ricchiuto
“The Fed hiked rates 25 basis points as the market expected. I still think this will be seen as a mistake in the period ahead. The Fed rushed this move and did so with no change in their macro forecast or assessment of the current environment.
Although they left the ‘Dots’ unchanged, the tone of the Committee’s forecast turned a bit more bearish.
This helps explain why the long end did better on the announcement. Without any real upside momentum in the core or a broadening out in the inflation base they hiked rates.”
Morgan Stanley, Ellen Zentner
“After today’s action, the FOMC still described the stance of policy as accommodative, which means it still feels (at this point) it can do more.
Moreover, financial conditions eased on the back of today’s action, which if sustained, would suggest to policymakers more adjustments are needed. Incoming data have unfolded in line with the Fed’s current outlook, so there was nearly no change in the Fed’s SEP and only a ‘very modest’ adjustment to the expected path for rates.
The balance of risks to the outlook were still seen as ‘roughly balanced,’ and continued gradual increases in the federal funds rate, all else equal, are expected.”
UBS, Samuel D. Coffin
“New language on inflation mostly was a mark-to-market, but the paragraph on the policy outlook included a new inflation trigger for policy: ‘The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.’
In January the Statement had said that the Fed would monitor ‘progress toward its inflation goal’ — no mention of ‘symmetric.’
“Some of the change reflects a recognition of reality as headline inflation reaches 2%.
However, with the new description of the inflation goal as ‘symmetric,’ we think the FOMC is warning against thoughts that it might temporarily let the economy run hot or might countenance above-trend inflation for a time — the FOMC would be just as aggressive toward above-target inflation as it has been toward below-target inflation.”
The Vanguard Group, Roger Aliaga-Diaz
“The Fed’s decision to raise interest rates today is in line with Vanguard’s perspective of the state of the US economy.
We are pleased that the Fed is moving towards normalization, as the balance of risk has clearly shifted. Further, for the second time in a row, we’re seeing the market aligning to the Fed’s expected path, rather than vice versa.
“We believe that additional rate hikes are warranted in 2017, given the strength of the labor market and upward inflation trends. We agree with the Fed’s signaling to allow inflation to run hot in order to achieve a sustained 2% target — yet anticipate another hike in June.”
Berenberg Capital, Mickey Levy
“The Fed’s heightened concern about inflation is warranted. Tighter labor markets, an improving economy and higher inflationary expectations have begun to generate wage and price pressures.
Based on the Fed’s forecast that the unemployment rate will fall below full employment, suggesting more wage pressures, and its forecast that real GDP will grow slightly faster than potential, suggesting less slack in the economy, the Fed’s forecast that inflation will not rise above 2% is risky.
Presumably it is based on the expectation that the stronger US dollar will continue to suppress import prices, and that wage and price-setting behavior remain muted.”
Brean Capital, Scott Buchta
“We continue to believe that the Fed will raise rates 2 times in 2017, although additional progress on the wage and/or inflation fronts could bring a third hike back into play.
We agree with the Fed that the risks to the outlook are more evenly balanced at the present time, but think that the strength of both the potential headwinds and tailwinds could be greater than many investors are expecting.”
Posted by: The Trust Advisor