Market Insider

Fed's failure to send a clear signal on rate hikes perplexes markets

Key Points
  • Bond prices were higher, stocks waffled and the dollar flip-flopped after the Fed's post-meeting statement failed to deliver the clarity markets were looking for on the course of rate hikes.
  • The Fed has forecast a total of three rate hikes for the year, but many market pros believe it will continue its once-a-quarter hiking pace and raise the fed funds target rate a fourth time.
  • Bond yields, which move opposite price, retreated on the day. The most Fed-sensitive 2-year yield fell about 3 basis points to 2.49 percent, from a more than nine-year high.
Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., U.S., on Wednesday, March 21, 2018
Andrew Harrer | Bloomberg | Getty Images

Bond prices moved slightly higher and stocks waffled after the Fed sounded slightly less "hawkish" than expected and failed to end the debate on how many times it will hike rates this year.

The Fed left rates unchanged Wednesday, after hiking a quarter point in March, and added minor tweaks to its comments on inflation and the economy. But some traders had expected the Fed to clearly signal whether it will pull the trigger on two or three more rate hikes this year.

The Fed has forecast a total of three interest rate hikes for 2018. Some market participants have said they believe it will raise rates once a quarter instead, making it four for the year. But there is an even split. According to CNBC's Fed survey, about 46 percent of respondents expected two more hikes in 2018, while the same percentage saw three, ahead of the Fed's meeting this week.

"That debate is going to be ongoing," said Michael Schumacher, director of rate strategy at Wells Fargo, after the Fed statement was released. "I think it's basically a non-event. Maybe it's slightly dovish if you really have to tease something out of it."

Jim Grant comments on Fed decision
Jim Grant comments on Fed decision

Bond yields, which move opposite price, fell on the day, with the Fed-sensitive 2-year yield dipping to 2.49 percent. The 2-year had earlier risen above 2.52 percent, a more than nine-year high. Stocks moved slightly higher before giving back gains and moving lower on the day.

"The market doesn't want them to raise too aggressively," said Michael Arone, chief investment strategist at State Street Global Advisors. "That's one reason why, despite very good earnings, you're not getting the market moving higher."

Fed watchers had expected the Fed to acknowledge that inflation is moving higher, after lagging. The Fed did say inflation has moved close to its 2 percent target, and that it would take a symmetric view of inflation, meaning it expects it to run both below and above target.

The Fed also said it sees that household spending moderated from a strong fourth-quarter pace, but it said business fixed investment continued to grow strongly. In the same sentence, some traders read the business spending comment as hawkish and the household spending comment as dovish.

"In some type of Fed language, the fact is that they didn't signal a more aggressive path to tightening. That was the fear going in, and this is probably being interpreted as somewhat dovish," said Arone.

Several bond market pros who had expected four rate hikes said the statement did not change their view. But others were reassured the Fed was not ramping up market expectations for more rate hikes. The Fed is next expected to raise rates in June, and at that time it will release new forecasts for the economy and interest rates.

"People are latching on this comment the Fed took out of the statement. Last time, [they said] the economy has strengthened in recent months. Now that's gone," said Schumacher.

Schumacher said market expectations for further rate hikes were basically unchanged after the statement. "People looked at the statement, read it, Treasurys reacted for a few minutes, and not much has happened," he said.

He said the fed funds futures indicated 2.3 quarter-point rate hikes this year and after the Fed statement, the futures were barely changed.

The dollar index hit a new high for the year ahead of the Fed statement, and traded lower afterward but reversed course again.

"It's a continuation of what they're doing — they're still hiking," said Win Thin, senior currency strategist at Brown Brothers Harriman. Thin said the dollar's pullback was understandable after recent gains. The dollar index was up 0.1 percent at 92.45.

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