U.S. Fed maintains guidance, expects rate hikes at quicker pace

(Reuters) - The U.S. Federal Reserve on Wednesday renewed a pledge to keep interest rates near zero for a "considerable time" and repeated concerns over slack in the labor market, standing firm against calls to overhaul its policy statement. Many economists and traders had expected the central bank to alter the rate guidance it has provided since March, given generally improving data on the economy's performance. KEY POINTS: * The Fed repeated its assurance that rates would stay ultra-low for a "considerable time" after a bond-buying stimulus program wraps up. In a statement after a two-day meeting, it announced a further $10 billion reduction in its monthly purchases, leaving the program on course to be shuttered next month. * The policy-setting Federal Open Market Committee also repeated its assessment that a "significant" amount of slack remains in the U.S. labor market, a further sign it is no rush to raise benchmark borrowing costs. * Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser dissented on Wednesday. * The Fed suggested a faster pace of rate hikes than envisioned in the last projections in June. For the end of next year, the median of the projections was 1.375 percent, compared to 1.125 percent in June, while the end-2016 projection moved up to 2.875 percent from 2.50 percent. For 2017, the median stood at 3.75 percent. COMMENTS: ROBERT STEIN, CHIEF EXECUTIVE OFFICER AT ASTOR INVESTMENT MANAGEMENT IN CHICAGO, ILLINOIS: “The slightly new higher rate predictions suggest the Fed, once they start raising rates, will need to be more aggressive than previously thought. But I don’t think it will slow down or derail the economy, I think the economy can handle it.” DAVID JOY, CHIEF MARKET STRATEGIST AT AMERIPRISE FINANCIAL IN BOSTON: "I expected that the Fed wouldn't alter its language much at all. The economy has been doing better, but some data has been soft, including the payroll report, which would've been the last one the Fed saw. That buys the Fed another meeting or two before it has to change its language. "It isn't a surprise that it wasn't changed, but the language will have to be changed soon, possibly with the next meeting and that could result in the pullback we're waiting for. This statement won't result in that pullback, though. Right now the environment is still conducive to higher equity prices." ERIC LASCELLES, CHIEF ECONOMIST FOR RBC GLOBAL ASSET MANAGEMENT IN TORONTO: “It’s a curious statement and forecast instead of decisions. The qualitative assessment is fairly tepid, the economy is moderate and they still talk about underutilization in the labor market even after Jackson Hole suggesting there wasn’t as much slack. The housing recovery is still being called slow even though it has actually had some handsome numbers recently with housing starts and the NAHB. "And inflation is below objectives and they don’t talk about it having moved closer. So there is some dovishness in the qualitative economic assessment and the GDP forecasts are pulled down for 2014 and 2015 but, of course everything else is fairly hawkish and this is why the market is struggling so much with it. "The thing I find quite hawkish is twofold, one is quite subtle and one is more obvious, the 2017 fed funds rate dot plots are very aggressive – 1.375 as the expected average to me is a shocker. I would have thought it would take a few more years to get all the way up to what they perceive to be a neutral rate so that to me is very hawkish. The other one is maybe a little bit of overthinking, but now that we have 2017 GDP forecasts we can get a sense of how much slack the Fed thinks is in the economy, and if they know the longer run goal is 2.15 percent, that is what they think is sustainable, they left 2017 where it is only a little bit more than the longer run goal which means they are assuming the economy has done most of the hard work by then." "I fully believe they will hike in mid-2015, maybe even in the spring of 2015 but I suspect they will encounter an economy that is extremely sensitive to interest rate movements so I suspect they will need to move more slowly than this but for now they are sending a fairly clear signal in terms of their intentions." JIM O’SULLIVAN, CHIEF U.S. ECONOMIST AT HIGH FREQUENCY ECONOMICS IN VALHALLA, NEW YORK: "Changes in the statement were pretty minimal, the message from that is they’re in no rush to tighten. Although when you look at the numbers, the median estimate of where the funds rate is going to be over the next few years went up. The numbers are more hawkish, even if the words barely changed at all. "Again the message is they’re in no rush to tighten but ultimately they think there will be more tightening than the market is pricing in, but again, not immediately." PATRICK MALDARI, SENIOR INVESTMENT MANAGER, ABERDEEN ASSET MANAGEMENT IN PHILADELPHIA: “Once again, with their statement today, Fed officials reiterated that they expect to maintain the current target range for the federal funds rate for 'a considerable time' before they raise their target for short-term interest rates. Time is running quite short, we suspect, on this 'considerable time' language. Specifically, we think that today's message may be the last Fed statement to include that language, which has been included in the last several post-FOMC meeting statements. "The Fed's bond-buying program is set to end in October, so they will have to amend their comments at that time. The U.S. economic recovery seems to be on firmer ground based on economic releases in recent months, and we believe the Fed is concerned about complacency among investors. Both are reasons to expect the Fed to raise rates at some point in the second half of 2014, in our opinion, but they appear to be in no rush. The Fed did publish new guidelines for its exit strategy, saying that the phase out of reinvestment 'will depend on how economic and financial conditions and the economic outlook evolve.' MARK GRANT, MANAGING DIRECTOR AT SOUTHWEST SECURITIES, FT. LAUDERDALE, FLORIDA: "The dot rate projections - 1.27 percent average for end of next year, up from 1.2 percent in June – may cause flattening in the near term, but flattening as the long end of the curve pushes down the market with lower yields in longer maturities. Equities will be appreciative of the continuing dovish attitude. "Talk about rising rates 1 1/4 years from now is just that, talk. The timeline is way too far away to be effective. Also remember we have ISIS, the Middle East, Ukraine and who know what else before we reach that point in time. The dots and comments equal lower yields, in my opinion. I believe the 10-year yield will go back through 2.50 percent and then 2.25 percent and grind down eventually to 2 percent." STUART HOFFMAN, CHIEF ECONOMIST, PNC FINANCIAL SERVICES GROUP, PITTSBURGH, PENNSYLVANIA: "In terms of the so-called dot plot, where people think the fed funds rate is going to be at year-end, I didn’t see much of any change for 2015. It still looks like the same kind of plot. "For 2016 it might have moved up a bit, the end of 2016 seems to be somewhere around 2.5-3 percent, some above, some below. And for the first time they put in 2017. And 2017 they think interest rates will be back to what they call the long run level. The long run level didn’t change much. It still seems to be about 3 and three-quarters, the consensus. Obviously there’s a range. "And if you look at the majority of the expectations for the end of 2017, the fed funds rate will be around 3 and three-quarters. The Fed has now with the addition of one year told you this normalization process, whenever it begins sometime and I would still argue mid 2015, it will probably take them the better part of two-and-a-half-years to get the funds rate up to where they think it should be, something between 3.5 and 4 percent." ART HOGAN, CHIEF MARKET STRATEGIST, WUNDERLICH SECURITIES, NEW YORK: "The only thing that's changed is we're starting to get a better understanding of what the normalization process will look like. But we're certainly not any closer to knowing when it starts. and that's what had been anticipated. "The economic outlook we've been waiting to see, and it's actually constructive. The only problem is when you project out to 2017 you've gone beyond the time frame that's predictable... But you can't start normalizing your policy if you don't have positive projections." JOHN CANALLY, INVESTMENT STRATEGIST AND ECONOMIST FOR LPL FINANCIAL IN BOSTON: “There are two dissenters, there was only one last time. Sort of a mixed message, they retained all the language, they didn’t make it data dependent, they kept 'considerable period' in there. I thought initially they made it data dependent but they didn’t. So the FOMC statement except for the dissent is largely the same, but the dots are more hawkish, the exit strategy itself being out there is more hawkish – no one expected that - and the timing of the first rate also more hawkish. On balance it’s more hawkish but I think (Fed Chair Janet) Yellen might try to massage it, as she typically does to weigh more on the dovish side. So we’ll see, that is the beauty of doing this on the day of a press conference, you will get the color." SAM DIEDRICH, PORTFOLIO MANAGER, PACIFIC ALTERNATIVE ASSET MANAGEMENT CO, IRVINE, CALIFORNIA: "The market seems to be taking this a little bit more hawkish, it seems to be a little bit more hawkish. I don’t think there were big expectations for this release, but there was talk about changing the 'considerable time' framework. That seems to be unchanged. "They’re going to have to walk a tight rope on the communications as they move to a more data-driven policy instead of forward guidance. They’ll probably want to tackle that over time, instead of in this meeting." TODD HEDTKE, VICE PRESIDENT FOR INVESTMENT MANAGEMENT, ALLIANZ LIFE INSURANCE OF NORTH AMERICA, MINNEAPOLIS: “The dots went up but the statement didn’t change. The dots and the statement are telling different stories. There’s a mismatch. The market was clearly expecting the language to change. That didn’t happen. We are clearly in the camp of a rate increase in the second quarter of next year. You are starting to see a little bit of disagreement. Now you have two dissenters. Last meeting you had one. The quick reaction is that short- and medium-dated yields have risen on the dots. The equity market has been pretty flat on the day, a fairly benign reaction given the language.” ANTHONY VALERI, INVESTMENT STRATEGIST, LPL FINANCIAL, SAN DIEGO: "The market is reacting a little negative, and I think it is focusing on the 2015 median, which was raised from 1-1/8 to 1-3/8. That is what is driving it. It implies the Fed will hike more than anticipated in 2015 and maybe hike more in 2016 than the market anticipated. The overall statement is "not terribly surprising. They maintained the 'considerable period', which helps support market confidence. They also downgraded their GDP assessment for 2015. They tried for balance with the 1-3/8 and the considerable period language." DAVID SCHAWEL, VICE PRESIDENT AND FIXED-INCOME PORTFOLIO MANAGER OF SQUARE 1 FINANCIAL IN DURHAM, NORTH CAROLINA: “So this statement was very dollar positive and hawkish at the margin with the FOMC estimates for the fed funds rate coming in higher than expected in 2016 and 2017.” TOM PORCELLI, CHIEF U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK: “There’s nothing here that people can really sink their teeth into. They made some marginal changes to the statement. If you want to split hairs, they marked to market the inflation sentence. They now say that inflation has been running below the committee’s long run objective, previously they said inflation had moved somewhat closer to the committee’s long run objective. On the face of it you could say that is kind of a dovish slant, but overall there’s very little here...I don’t think there is anything in here that is a big reveal." STEPHEN STANLEY, CHIEF ECONOMIST, PIERPONT SECURITIES, STAMFORD, CONNECTICUT: “What is most striking is where the dots are. They want to remind the market that what it has been pricing in is too low. The increase in the dots in June is a pretty good indication that rates will be heading to more normal levels, certainly by the end of 2017. Eurodollar futures had been pricing in very low levels of rates. They are pretty happy with what the market has priced in with the first rate move. They didn’t want to fiddle too much with the language in this statement. As for the exit plan, it’s pretty in line with what we have seen in the minutes. It’s a more dovish path. They are not going to let the balance sheet shrink until probably 2017.” JOHN KILDUFF, PARTNER, AGAIN CAPITAL LLC, NEW YORK: "While the much analyzed phrase 'considerable time' remained in the FOMC statement, the newly announced scheme for interest rate normalization shows that higher rates are in the cards, likely sooner than mid-2015. "The recent dollar strength and commodity weakness from that strength should continue, as a result. Also, with the end of quantitative easing occurring next month now, the hyper-accommodation is being removed. "The withdrawal is because of improving conditions which is conversely supportive of crude oil, due to rising demand for refined products in the United States." MARGARET PATEL, SENIOR PORTFOLIO MANAGER AT WELLS CAPITAL MANAGEMENT IN BOSTON, MASSACHUSETTS: “(The Fed statement) shows considerable sensitivity to market reaction - they’re balancing reducing bond buys with leaving the considerable time intact. That says that we shouldn’t look for any large increases in rates, certainly not over the next 12 months. They’re trying to jawbone market participants and trying to steer the market into the kind of reality that they want to see.” WAYNE KAUFMAN, CHIEF MARKET ANALYST AT PHOENIX FINANCIAL SERVICES IN NEW YORK: "From what I'm seeing, there are no major changes, and the market should be reasonably satisfied with that. At this point, assets have been positioned for rates going up at some point in the future, so it shouldn't have much impact. Everyone has been waiting on this. Now we can get back to business. "The 'considerable time' phrasing was key, and while Plosser had objected to that wording before, now Fisher has as well. That's interesting. But other than that, no changes. I don't think Yellen wants to become more hawkish given that we've seen some softening in the labor market." MARKET REACTION: STOCKS: U.S. stock indexes swung from negative to positive territory, and were last higherBONDS: U.S. bond prices pulled back from earlier gains, yields roseFOREX: The dollar rose against the euro (Americas Economics and Markets Desk)