While Yellen still speaks in her historic "first rate hike in years" press conference, the sellside has already shared its kneejerk reaction to the Fed's announcement, and as Citi notes, "It’s calm on the floor considering the first rate hike in years. More attention on WTI crude, which remains 4% lower to 35.80 after DOE inventory build."
More from Citi:
Our Treasury desk notes real money flow in front end with better buying around the 2-year point as its yield briefly popped above 1%. Little seen in the back end.
Credit spreads remain tighter by 1-3bp although there are spots of weakness, like some energy names where spreads are +25bp. “Maybe a touch better now, but tone was firm pre-Fed so can’t really attribute this to Fed,” our tech trader says.
Selling was seen in the credit ETFs right after the Fed, took prices off the highs. Lots of action in the options space, trader there says market is moving fast.
HY25 is up around 1/2 point, the highs of the day now, nearing 101 as IG moves 1.5bp tighter. HY25 is well bid.
Here is Goldman:
BOTTOM LINE: The FOMC raised the funds rate to 0.25-0.50%, as widely expected. The post-meeting statement signaled a baseline of further funds rate increases, but expressed caution about inflation developments. The Summary of Economic Projections (SEP) showed an unchanged median funds rate for end-2016; median projections for 2017-18 declined moderately.
MAIN POINTS:
1. The FOMC raised its target rate for the federal funds rate at today’s meeting to a range of 0.25-0.50%, ending a seven-year period at 0-0.25%. The supplementary “implementation note” announced the following changes: an increase in the interest on excess reserves rate (IOER) to 0.50% (from 0.25%); an increase in the reverse repo (RRP) facility rate to 0.25% (from 0.05%); a removal of the cap on the RRP facility (it will be constrained only by the stock of Treasury securities held by the Fed; previously the Fed capped this program at $300bn); and an increase in the discount rate to 1.00% (from 0.75%).
2. The post-meeting statement signaled a baseline of further funds rate increases, but expressed caution about inflation developments. In particular, the statement said: “In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”—stressing the “gradual” message repeated in many public comments by Fed officials. The statement also added that “some” survey-based measures of longer-term inflation expectations “edged down”.
3. The statement also noted that the “stance of monetary policy remains accommodative”, even after the increase in the funds rate—a phrase the FOMC also used during the 2004 tightening process. Additionally, the statement said that the runoff of the Fed’s balance sheet is not likely to begin until “normalization of the federal funds rate is well under way”.
4. In the Summary of Economic Projections (SEP), participants made few changes to their forecasts for the economy and monetary policy. Fed officials raised their projections for GDP growth moderately for 2016 and lowered their projections for the unemployment rate. However, they also reduced the projection for core PCE inflation to 1.6% for end-2016 from 1.7% previously. The median projection for the funds rate at the end of 2016 was unchanged at 1.375%; the median funds rate projection for the longer run was also unchanged at 3.5%. Median projections for 2017-18 declined moderately.
And UBS:
Give the people what they want?
The FOMC met market expectations and hiked rates by 25 basis points, bringing the target range for the Fed funds effective to 25-50 basis points from 0-25 basis points. This move ended seven years of official rates at the zero bound. With the rate hike now behind us the market will shift to focus on three key questions: First, can the Fed make this rate hike "stick" using the tools they currently have. Second, how fast will the Fed keep moving? And, third, what will they do with the enlarged balance sheet?
We believe that the Fed will be able to enforce the target range although we expect it will require the Fed to ramp up the use of reverse repos, consistent with the announcement that repos would only be limited by the Fed's Treasury holdings. We expect the Fed to hike rates by 25 basis points per quarter in 2016, in line with the "dot plot" provided by the Fed but still faster than is priced in by futures markets.
Data dependent or gradual? Both, if their forecasts are correct.
The statement suggested a committee with solidified views: risks are "balanced", instead of "nearly balanced" and inflation is expected to rise "to", not "toward", two percent. Despite this confidence, as we expected, the Fed stressed that further hikes were likely to be gradual but are data dependent.
At the same time, they did not lower their already gradual expectations for 2016, keeping 100 basis points of tightening over the year as its median (and modal) rate. That said, there was a skew lower in the 2016 dots, but not one we see as being material given the composition of the voters in 2016.
What about the balance sheet?
In the near term the Fed will be using reverse repos and interest on reserves to manage the Fed funds target. They did not offer up a schedule for returning the balance sheet to normal via roll-offs or (less likely/more problematic) asset sales. We had anticipated that the Fed would begin to allow roll-offs by mid-year as they continued to normalize policy. However, the statement notes that balance sheet adjustment is unlikely until "normalization of the level of the federal funds rate is well under way." As such, it now seems likely that a sustained balance sheet roll off should not be expected until 2017.
