FOMC maintains stimulus measures and anticipates interest rate hikes by 2023 Reuters – Economy and Finance

© Reuters. File photo: The Federal Reserve Board Building on Constitution Avenue taken in Washington, USA on March 27, 2019. REUTERS / Brendan McDermid

New York (Reuters) – The Federal Reserve advanced its forecast for the first interest rate hike since the pandemic to 2023 on Wednesday, citing improved health and abandoning long-standing claims that the crisis is weighing on the economy. .

The new forecast shows that most of 11 Fed officials plan to raise interest rates by at least two 25 basis points in 2023, although officials promised in a statement after the two-day policy meeting to temporarily maintain support. policy to encourage the continuation of the recovery occupation.

The Fed also made technical adjustments to prevent the benchmark interest rate from dropping too low. Holds the reserve interest rate it pays to banks – IOER – at the Central Bank of the United States for five basis points and raises the interest rate it pays in the overnight reverse repurchase agreement from zero to 0.05%, which is used to set a lower limit for short positions – Forward interest rate.

Market reaction:

Equities: decline widened to -0.83 %%

Bonds: climbed to 1.5464%, 2-year yield increased to 0.1911%

Gearbox: turn higher. Latest 0.57% increase

Notes:

GUY LEBAS, Chief Fixed Income Strategist, JANNEY MONTGOMERY SCOTT, Philadelphia

“The increase in the IOER actually serves to alleviate some of the pressure on the front-end of the liquidity tsunami curve in the financial system. Bank reserves are excessive and money market funds find it difficult to achieve positive returns anywhere, so it solves some of these problems. But it does. It will also have the effect of pulling the yield up a bit, which can last for about three years, because the relative value of the two- or three-year banknotes depends in part on what interest rates the bank can get overnight. which is now a bit high “.

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“I don’t think there is much information being conveyed in the form of points at this stage, because when the economy fluctuates, you are measuring the median forecast. This is also a conditional forecast. I think the conditions on which the predictions are based are not at best. Stable and unlikely. “

KARL SCHAMOTTA, Director of Global Product and Market Strategy for Global Payments, Toronto Cambridge

“We may not see a reduction in panic, but we have seen a hiss in the currency market. Interestingly, the Fed has not only acknowledged that inflation is rising, but that the US economy has a lot of momentum, and it’s already here. In the group’s forecasts, it has essentially transformed into a more aggressive position ”.

JACK ABLIN, Chief Investment Officer, CRESSET Wealth Advisor

“I think this is very close to what the market wants. The market wants the Fed to tell investors there is nothing to see here. Go ahead and there is no progress in the economy or inflation. We will maintain an active easing policy. “

“The Fed hasn’t completely denied it, as the market hoped. They realize that they will have to respond at some point in the future. But I call it a tilt, not a change of direction. The Fed is still maintaining its political stubbornness. “

RYAN DETRICK, Senior Market Strategist, LPL Finance, Charlotte, North Carolina

“The market is a little low, but you will see it in the days of the Fed.

“Inflation expectations (from the Federal Reserve) have increased dramatically, a little higher than the March forecast, and it is now possible to raise interest rates for the first time in 2023. There has been a knee-jerk reaction and the market is trying to digest it.

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“But the market anticipated it. The market is experiencing the typical daily Federal Reserve volatility.

“It’s like when the Federal Reserve makes an announcement, you feel very excited and excited, but the market fell asleep overnight and the next day was different.

“They raised their GDP forecasts. We have a stronger economy and stronger inflation. These shouldn’t surprise anyone ”.

“The bond market is quite calm. The stock market usually experiences the Fed turbulence that day, but the bond market seems to respond calmly, which is a fundamental gain.

“There are no signs of reduction, but we will see in the question and answer session.”

Francis Donald, Global Chief Economist of Toronto’s Investment Management Department Manulife Investment Management, “The dot chart now shows that there will be two interest rate hikes by 2023. This is a hawkish surprise for the bond market and has attracted all the attention. “

“Interestingly, the Fed has raised its estimate of the time of the first interest rate hike, but has not substantially changed its growth and inflation forecasts for 2022 and 2023. What it tells us is that, although perspectives have not changed significantly, it appears that the Fed has the confidence to restore the normal environment ”.

“The tone hasn’t changed substantially. There are only a few adjustments to this statement.

“The market is reacting to little information in the bitmap. Now is the time for Powell to try to discourage the market from over-interpreting the bitmap. “

Tom Martin, Senior Portfolio Manager, Global Investments, Atlanta

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“The market wants to see the Fed report that it will provide the easing policy the country needs while keeping an eye on inflation. For me, what you get from this statement is exactly what the market wants.

“On average, the market wants to measure the Fed, and it absolutely does in this version.

“I think the movements of the S&P and Nasdaq indices are not very significant”.

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