Fed keeps rates unchanged, specifically mentions Dec meeting

KEY POINTS:

*Following a two-day policy meeting, the central bank said it was still monitoring economic and financial developments abroad, but did not repeat that global risks would have a likely impact on the U.S. economy, as it warned at its last meeting in September.

*That omission marked a softening in tone compared to the Fed's statement last month.

*The Fed's policy-setting committee also noted that U.S. job growth had slowed and the unemployment rate had held steady. It repeated in its statement that "underutilization of labor resources has diminished."

*"The committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced," the Fed said in its statement. It added that the U.S. economy has been expanding at a moderate pace.

*Most Fed policymakers have said they expect to raise rates in 2015, but two broke ranks with Fed Chair Janet Yellen this month, questioning her view that labor market tightness will fuel inflation and overheat the economy.

COMMENTS:

JEFFREY CARBONE, SENIOR PARTNER AT CORNERSTONE FINANCIAL PARTNERS IN CHARLOTTE N.C.:

    The meeting notes are "showing a little bit more of a hawkish view, not a major hawkish view but just some change in words.

    "Last meeting the buildup was greater than the event itself in September, because nothing happened when they had probably a good chance to raise rates at that point. (This time) the language is kind of showing that inflation is slightly down versus down, you had moderate growth in the business sector, so you see some more language and more wording showing positives towards a rate hike."

    "Could December be on the table? If we get the debt ceiling issue and the budget behind them could give a little bit more clearance for that rate hike for the Fed.”

AARON KOHLI, INTEREST RATE STRATEGIST AT BMO CAPITAL MARKETS IN NEW YORK:

“I thought it was very hawkish all around. There’s some here who read it as more balanced, but for me big changes were that Fed thinks it’s appropriate to raise target at next (meeting), which suggests they’re on the trigger and ready to go.

“One of the things that held them back in September was deterioration in emerging markets and the fact that those markets aren’t collapsing I think is part of why there’s less emphasis on the global this time.

"They were concerned about emerging markets, but those markets aren’t falling out of bed. With that mitigated a bit, it should give the Fed some confidence that they can gradually raise rates beginning in September. The pace has to be gradual. They made it clear they’re leaving December on the table and I think they’re going to accomplish that. The current selling off in equities will persist. To be fair, the equity markets aren’t responding well, but not 200 points down either.”

SCOTT CLEMONS, CHIEF INVESTMENT STRATEGIST, BROWN BROTHERS HARRIMAN, NEW YORK:

“I think the Fed may be running a risk here of sending mixed messages.

"The market doesn’t believe her,” he said of Fed Chair Janet Yellen’s stance that the tightening cycle could start in 2015.

“The Fed acting on its own has already had an impact on currency markets, they are looking at that as making part of their work for them.”

BRIAN JACOBSEN, CHIEF PORTFOLIO STRATEGIST, WELLS FARGO FUNDS MANAGEMENT, MENOMONEE FALLS, WISCONSIN:

“The Fed has dialed down its anxiety over international developments, but it’s best to play it safe, lest things flare up again. The continuing conundrum for the Fed will be whether and when inflation will rise. It’s still being weighed down by energy and import prices. By December, the year-on-year comparisons will be more favorable, but probably not favorable enough to merit a hike quite yet.”

ANETA MARKOWSKA, CHIEF U.S. ECONOMIST AT SOCIETE GENERALE, IN NEW YORK:

“It’s a subtle attempt to gently nudge the market in that direction, but not doing it so strongly that it would start to tighten broader financial conditions. It’s actually pretty clever. By specifically referring to that meeting they are basically testing the waters a bit, without unnerving the market.

“It suggests they are having to mark themselves to market, in a sense, by December. It’s definitely trying to keep the possibility of a hike alive. But it just keeps the door open. It doesn’t necessarily signal to me strongly that they have an intention of hiking (in December).”

MICHAEL MARRALE, HEAD OF RESEARCH, SALES AND TRADING AT ITG IN NEW YORK:

“Obviously the first move [in stocks] is down, which is conventional wisdom. However I do like the idea of Fed having more confidence in the economy, less concerned about the global backdrop and willing to ring the bell on the long term health of the U.S. economy with a rate hike.

"So in this case, I want to fight the Fed. The economy needs their stamp of approval which comes in the form of a rate hike. People will think things through and really get to the core of what matters and that is the health of the economy. Even if it gets to be a series of 25 basis point moves, the markets can live with that and equities are still the investment genre of choice for the foreseeable future.”

AXEL MERK, PRESIDENT AND PORTFOLIO MANAGER, MERK HARD CURRENCY FUND IN PALO ALTO, CALIFORNIA:

"That’s exactly what I expected. In September they didn’t hike because of conditions in the market, but now the market conditions are gone and they still haven’t hiked...not realizing that then (in December) the markets are going to have a fit again. They’re trying to raise rates, but let’s see how the markets react to that.

"Ultimately the reason they couldn’t raise rates is not because of China or anything else, it’s because the fear put into the markets because the Fed is going to raise rates. They’ve been chasing their own tail. That’s why whenever they take a step in one direction they end up having to step back. So, they’ll try again (in December) and we’ll see whether it works this time."

PAUL SCHATZ, PRESIDENT AND CHIEF INVESTMENT OFFICER AT HERITAGE CAPITAL IN WOODBRIDGE, CONNECTICUT:

"The statement is as expected. We knew they weren’t raising but they had to move away from dovish statement that focused on China and Asia last time and grease the skids for a December increase. We see a more hawkish statement than we saw six weeks ago.

"Gold stocks are down, we’re seeing a couple of strong selling waves. Normally you get a couple of violent moves in the market, but the early signs of this one suggest selling could run into the bell. The dollar got very strong, it’s trying to break out again. Curiously commodities led by oil are hanging in even in the face of the strong dollar. Dollar and commodities are usually inversely correlated, but not always to the second minute hour or day "

MARKET REACTION:

STOCKS: U.S. stock indexes sold off, reducing the day's gainsBONDS: U.S. bond prices fell, boosting yields, particularly the front end of the yield curveFOREX: The dollar reduced gains against the yen, rose against the euro

(Americas Economics and Markets Desk; +1-646 223-6300)