Fed to remain 'patient,' expects inflation to rise in 'medium term'

(Reuters) - The Federal Reserve on Wednesday repeated that it will remain "patient" in deciding when to raise interest rates, and said the U.S. economy is on track despite turmoil in other markets around the world. KEY POINTS: *Concluding their first policy-setting meeting of the year, Fed officials looked past the urgent moves made by other central banks this month to boost their struggling economies and saw continued economic expansion in the United States. *The Fed acknowledged that inflation had declined further below its longer-run objective and that market-based inflation measures had fallen substantially - a more negative assessment of inflation pressures than in December. COMMENTS: JOHN CANALLY, INVESTMENT STRATEGIST AND ECONOMIST, LPL FINANCIAL, BOSTON: “On the bond market, the fact that they are kind of seeing some spillover of lower oil prices into measured inflation and inflation expectations shouldn’t be new news, but the market took it that way. People are buying (30 year Treasuries) on the lower inflation expectations although they were pretty upbeat on growth overall. “I think the dollar is still the cleanest shirt in the hamper but the Greece situation is not going away. Until that is resolved, and ultimately I do think they stay in the euro zone, it will create a better situation for the dollar.” JOHN BELLOWS, PORTFOLIO MANAGER, WESTERN ASSET MANAGEMENT, PASADENA, CALIFORNIA: “The Fed statement shows the tension within the Fed. Growth is doing well and the labour is improving, but inflation is very uncertain and that’s a concern for them. "It’s hard for them to generate that reasonable confidence about inflation rising so they could raise rates by June. The lower oil prices and a stronger dollar should hold down inflation through June. Growth will remain strong and pull inflation higher, they say. You might see those conditions before the end of the year when they might raise rates. For the bond market, it’s a more a duration story today. You are seeing intermediate and long-dated yields falling. We see more value in corporate bonds and EM bonds. It’s hard to see value in 10-year Treasuries yields at about 1.70 percent. TIPS have been challenged with falling breakevens which are consistent with inflation uncertainty.” JIM KOCHAN, CHIEF FIXED-INCOME STRATEGIST AT WELLS FARGO FUNDS MANAGEMENT, LLC, MENOMONEE FALLS, WISCONSIN: “The inclusion of ‘international developments’ in the Fed statement could be a reason we are seeing the bond market rally. "The economy is doing well, labour market conditions are improving and the drop in oil prices is boosting household purchasing power. There is some concern that inflation is moving away from the 2 percent target, but that is due to oil, and that could be transitory. They will watch the core indices for any signs that those indices are also weakening. "They added a reference to 'readings on …international developments', suggesting that some members are concerned that a stronger dollar and poor growth overseas might slow growth in the U.S. If that appears to be happening, they might delay the increase in the fed funds rate. For now, however, a mid-year start to the normalization of policy is still my best guess.” BARRY HoAire, FIXED INCOME PORTFOLIO MANAGER AT LOS ANGELES BASED BEL AIR INVESTMENT ADVISORS: "The Federal Reserve kind of... maintained the pledge that they're going to be patient. That was big, because everybody has baked into the cake at least one interest rate hike this year. Some people thought maybe even two. Now they're still telling you they expect to give you an interest rate hike. It may not be as early as some people expect. They're still telling you they expect to give you a 25 basis point increase this year. There's probably a good chance that happens." "This is an incredibly complicated time with all the government intervention and quantitative easing and essentially a race to the bottom for everybody's currency. They're doing everything they can to stoke economic activity." JIM O’SULLIVAN, CHIEF U.S. ECONOMIST, HIGH FREQUENCY ECONOMICS, VALHALLA, NEW YORK: “Just the inclusion of international development, that’s probably perceived as dovish and the bond market is rallying probably on that. International developments will likely slow them down than speed them up. They introduce that as a risk. They upped their view on growth to strong from solid. They went the other way on inflation. At the end of the day, the baseline is still June for lift-off, but it was never a promise anyway. They don’t have a forecast until March anyway. The employment rate is a critical gauge for the Fed. It keeps falling more than they expect.” ANDREW WILKINSON, CHIEF MARKET ANALYST, INTERACTIVE BROKERS LLC, NEW YORK: “No surprises. For the longest time we’ve had within the statement comments or concerns about where inflation was and they’ve retained their presence and position through a bear market for crude oil. So if anything that makes it more difficult for the Fed to raise interest rates. However, I’d say that we’re still on target for a June increase, but narrowly because I think the Fed wants to get off the floor, and the June meeting provides an accompanying press conference, at which point it will be able to explain why it’s doing what it’s doing. “The statement remains extremely well balanced. In the third paragraph, basically it says if the data changes, we’re going to change. Right now the best guess is that we’re going to raise rates, and if the data doesn’t support that view we’ll be slower in putting interest rates up. And all said and done, everybody is on the same page. There were no dissents this month.” JENNIFER VAIL, HEAD OF FIXED INCOME RESEARCH, U.S. BANK WEALTH MANAGEMENT, PORTLAND, OREGON: “There’s not a lot of shock-and-awe from this statement. They still have a labour outlook that is upbeat. They view the decline in energy prices as a net positive. They didn’t bring the dollar strength into the equation. Treasuries are rallying with some people seeing a possible dovish stand on market-based measures of inflation falling. "Global growth could cause confidence level to drop but we haven’t seen that. There have been a mixed bag of data recently. They have to acknowledge what’s going on overseas, but that’s a small component on determining with lift-off. At this point, wage growth picture is unclear. The forward expectations with inflation are stable. The Fed is on a path of policy normalization. "There is no budging for the Fed where growth is going. They are staying the course. Our forecast is for a June lift-off. It might be September if average hourly earnings don’t pick up. The pace of normalization is more important than the timing of lift-off for most market participants. We expect the curve to continue to flatten. We encourage our clients to avoid the short-end of the curve and we recommend ultra high-quality long-dated issues in the Treasuries and muni space.” BRIAN JACOBSEN, CHIEF PORTFOLIO STRATEGIST AT WELLS FARGO FUNDS MANAGEMENT IN MENOMONEE FALLS, WISCONSIN: “This was widely expected, which is what the Fed was probably hoping. It doesn’t want to rock the boat. Perhaps the Fed could be setting investors up for a surprise, but it would likely be a surprise of dovishness, not hawkishness. The biggest hint at that is the inclusion of the word 'international' for the developments the Fed is monitoring. "In December, it seemed as though the Fed was banking on core inflation not being affected by movements in energy prices. Today’s statement makes it apparent that they are less convinced that the core can stay insulated from the drop in oil prices. "Now, September is when I think the Fed will lift rates off zero. Instead of keeping the word 'patient' in the statement for this and the March meeting, I think they’ll keep it in there for the April meeting, as well. They could drop the word in June, leave it out in July, and then people will be braced for liftoff in September.” MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISER AT ALLIANZ, NEWPORT BEACH, CALIF.: “The Federal Reserve essentially stood pat as the gradual strengthening in the domestic economy confronts the impact of a weaker international environment. Look for the Fed to tweak its policy signalling in mid-March as it prepares markets for a first small interest rate hike this summer.” VASSILI SEREBRIAKOV, CURRENCY STRATEGIST, BNP PARIBAS, NEW YORK: "I don't think there are any major surprises here. The message is still balanced. "I don't think there is a big catalyst here for the dollar. Overall, markets have run with the long dollar position and I don't think this is likely to throw dollar bulls off course. "We don't get any additional information in terms of forecast or press conference and the language was not a surprise. So far the reaction has been muted and reflects the lack of surprises." PHIL ORLANDO, CHIEF EQUITY MARKET STRATEGIST, AT FEDERATED INVESTORS, IN NEW YORK: “The thinking has been the Fed won’t make a change on the Fed funds rate before June or September of this year but based upon the softness of some recent data, the thinking is that is looking more like September. Then there have been some folks that have been coming out in recent days saying it looks more like 2016 than 2015. "It’s absolutely steady as she goes, from the perspective of the Fed, they need to see some better data, some good data. We are going to get a GDP flash on Friday, the last 5 quarters have been pretty good, we need to see more of that. We need to see more of the 200k-plus nonfarm payrolls with the rate of unemployment coming down. What the Fed would really like to see is some uptick in inflation. But at least from a nominal standpoint that is going to be difficult with energy down 50 percent over the last 6 or 7 months. "The reality is that the collapse in energy prices probably provides the Fed with some additional cover to be lower for longer. So one of the things we are watching closely is what is driving energy prices, recognising the Fed may take that as a reason to stay at zero a while longer.” TOM PORCELLI, CHIEF US ECONOMIST, RBC CAPITAL MARKETS, NEW YORK: “Net-net any perceived hawkish changes were offset by some dovish changes. They say now that international developments will play into their thinking, some people may view that as dovish. On the other hand they draw the idea that declines in energy prices are a net positive from a U.S. economic perspective, so I don’t think that they’re really tipping their hand with regard to what is going to happen in the middle of the year. This is a very clean marking-to-market of the current backdrop, with no real tilt towards the hawkish or the dovish. In a lot of ways they did a good job in trying to make this net neutral.” JOHN SILVIA, CHIEF ECONOMIST, WELLS FARGO, CHARLOTTE, NORTH CAROLINA: "Steady as it goes. The risks are still nearly balanced, and there was no special mention of the dollar or international risk that I saw in the presentation. I think we’re still on (for a rate hike this year). You would have thought that if you were going to really postpone this to 2016 there would have been some more emphasis on international events and the dollar. The fact that there is no mention suggests the Fed is primarily focused on the domestic and not on the international factors that could influence policy going forward." BRUCE MCCAIN, CHIEF INVESTMENT STRATEGIST AT KEY PRIVATE BANK IN CLEVELAND, OHIO: "Given some recent economic statistics, the Fed feels there's a need to hold off on raising rates until mid-year or even later. No earlier than mid-year. Being "patient" means the Fed is in no hurry with respect to inflation or any other factor in the economy that it is watching. This isn't surprising at all; the Fed was always more patient than other observers. "I don't think markets will move too much on this. The bigger issue is where the economy goes from here, and investors have been sobering up on that, as it becomes clear that we're growing, but below historical levels." MARKET REACTION: STOCKS: U.S. stock indexes rose modestly before falling backBONDS: U.S. bond prices were slightly stronger and yields fellFOREX: The dollar was just slightly weaker (Americas Economics and Markets Desk; +1-646 223-6300)