Market Insider

Market shrugs off Fed's 'bland' comments on economy as it awaits Yellen replacement

Key Points
  • The Fed upgraded its view of the economy, calling activity "solid" for the first time since January 2015, which is the last time GDP was growing at 3 percent.
  • The Fed is seen as on track to raise interest rates in December but offered no guidance in its post meeting statement.
  • Stocks inched slightly higher, and Treasury yields were barely changed after the Fed's 2 p.m. EDT statement.
Measured Fed decision signals December hike likely

The markets shrugged off the Fed's statement on Wednesday that suggested it was on track to hike raise interest rates in December, though it provided no new clues other than to sound more confident about the economy.

Stocks inched slightly higher, and Treasury yields were barely changed after the Fed's 2 p.m. EDT statement. The Fed mentioned that economic activity has been rising at a "solid rate" even with hurricane related disruptions. In its September statement, the Fed had said activity was rising "moderately."

The Fed also repeated that inflation is expected to remain below its objective over the medium term, and that it will continue to monitor inflation closely.

"They didn't really raise any alarm bells," said Ed Keon, managing director and portfolio manager at QMA, a unit of PGIM. "They basically just kept it simple and straight forward."

"There's a certain benefit to a steady hand on the tiller, and they decided this is not a month to make news. This is a month to reassure that we're going to do what we said we're going to do," Keon said.

The Fed's two-day meeting wrapped up a day before President Donald Trump is expected to announce his replacement for Fed Chair Janet Yellen. Fed governor Jerome Powell is widely expected to be nominated for the post when Yellen's term ends in February.

The Fed did say "hurricane-related disruptions and rebuilding will continue to affect economic activity, employment and inflation in the near term," but it said storms do not materially change the course of the U.S. economy in the medium term.

"It's as much a place holder meeting as I can remember," said John Briggs, the head of strategy at NatWest Markets, about the statement. "We're going to have a new Fed nominee for chair tomorrow afternoon I hope, and December is priced in and remains so. It's a little over 80 percent."

The Fed's comments on the economy come as it grew at a 3 percent pace in the third quarter, the second 3 percent quarter in a row.

The Fed's reference to the economy as "solid" was the first use of that word to describe growth since January 2015, which was the last time growth was above 3 percent.

"When the Fed goes from modest to solid…it's a pretty significant change, but the markets are shrugging it off," said Jim Caron, fixed income portfolio manager with Morgan Stanley Investment Management.

Ward McCarthy, the chief financial economist at Jefferies, said "We expected this to be bland, and it was bland. I just thought they would be leaning in one direction or other. I thought they would be given a subtle hint. If they gave us a subtle hint it was so subtle I missed it."

WATCH: Fed leaves rates unchanged

Fed leaves rates unchanged