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Instant View: Fed revamps rates guidance, trims bond buys further

NEW YORK (Reuters) - The Federal Reserve on Wednesday dropped the U.S. unemployment rate as its definitive yardstick for gauging the economy's strength, but new Chair Janet Yellen surprised markets by saying the time between the end of bond-buying and rate increases could be on the order of "six months," swifter than many expected.

KEY POINTS:

* Fed dropping its promise to hold rates steady "well past the time" the U.S. unemployment rate falls below 6.5 percent doesn't indicate any change in the Fed's policy intentions.

* Fed cuts monthly purchases of U.S. Treasuries and mortgage-backed securities to $55 billion from $65 billion.

* Fed's assessment of the U.S. economy chalked up recent weakness to adverse weather.

COMMENTS:

PETER KENNY, CEO OF CLEARPOOL GROUP, NEW YORK:

"She certainly moved (the timetable) up a little bit and I don't think the market was expecting that at all because she is widely viewed as being more on the dovish side of the aisle than she is on the hawkish side. That is not a particularly hawkish comment, but the fact of the matter is it was not expected.

"Part of it is also the fact some of the hard data has been dropped. Unemployment 6.5 percent dropped, that is a less clear signal for the markets to interpret. A shift towards less clear measurements of quantitative help, that's a factor.

"The fact that that at the end of the day there are 10 billion fewer dollars in the market to provide artificially low rates, the market has to get accustomed to that new setting on the training wheels. And finally, consideration of macroeconomic data, the fact it has not significantly changed since December is a bit of a disappointment."

MARGARET KERINS, HEAD OF FIXED INCOME STRATEGY, BMO CAPITAL MARKETS, CHICAGO:

"Her speech was extremely dovish, but we believed going in to the Fed meeting today the market was priced to the perfect dove. There was a slight change in the summary of economic projections, the jobs were slightly more hawkish and the rapid improvement in the labor market was reflected in those projections by the Fed themselves, even though they're adding in quite a grouping of labor market indicators that they're watching.

"They're going to have to focus on that lack of growth potential going forward, and introducing that today. But clearly the market is reading it as hawkish. We don't think that the Fed given where we are in the economic cycle and in terms of the recovery, and our expectation that the economy will take off following this somewhat weather-related downturn that it's very, very hard to be credible about keeping rates really, really low."

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

"I think the (stock) market initially reacted negatively to the Fed's statement because the forward guidance is mildly hawkish. Yellen is no dove. She's a pragmatist. The new forward guidance axes the 6.5 percent unemployment rate and replaces it with inflation expectations. The interesting twist here is that the Fed is fine with a zero federal funds rate provided the Fed projects inflation to still be below its target of 2 percent. It used to be that the Fed would tolerate projected inflation running a half percent hotter than that. Also, it's not just about the Fed's projections, but the public's expectations of inflation. The Fed wants to keep inflation expectations anchored and those expectations can be fickle."

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

"It strikes me as a pretty dovish statement, but what surprised me is the word choice. Right now the unemployment rate remains elevated. I think that the Fed is far more focused on that than they are on their other mandate, inflation."

"The bigger picture here, to me this sends a very strong signal that the Yellen Fed is a continuation of the Bernanke Fed in one very important aspect. Whereas the Fed is often thought of as having two policy tools, balance sheet operations and interest rates, under Bernanke and Yellen they have made communication a very potent third tool as well. They're going to communicate, communicate, communicate so that when the fed funds rate begins to move higher, hopefully the collective economy shrugs its shoulders and says, ‘Yeah, we knew that was coming.'"

JIM KOCHAN, CHIEF FIXED INCOME STRATEGIST, WELLS FARGO FUNDS MANAGEMENT, MENOMONEE FALLS, WISCONSIN:

"The committee has updated its forward guidance, I wish they would tell us what that updated forward guidance is. We can assume their forward guidance is that they will be looking at broader measures of labor market activity to see when it's appropriate to raise interest rates, and 6.5 percent doesn't have much meaning anymore. If there are going to be any surprises it's going to be with the press conference. I think it was very much as expected."

DAVID MOLNAR, PARTNER AND MANAGING DIRECTOR AT HIGHTOWER, SAN DIEGO:

"The Fed moved the goal post again. It goes from a 6.5 percent unemployment threshold to a qualitative approach which is nebulous for the market. No one knows what will trigger further tapering, a pause in tapering or an increase in asset purchase. It's a major change in policy. This Fed seems to be making it up as it goes along. The markets are spiking on this even though analysts have been expecting this along. Gold has sold off and you are seeing pressure on bonds and rate-sensitive sectors."

MARK GRANT, MANAGING DIRECTOR, SOUTHWEST SECURITIES, FORT LAUDERDALE, FLORIDA: "What seems to be troubling the market is that even though it reiterated that it wouldn't be raising rates this year, people were put on notice that a hike is coming. We'll likely see some rise in short rates as a result of this, if not out across the whole curve."

SHAUN OSBORNE, FOREIGN EXCHANGE STRATEGIST, TD SECURITIES, TORONTO: "It's a little bit more hawkish than people expected. They seem to see interest rates rising sooner rather than later. People had been expecting something slightly more dovish given the effects on economic activity from the harsh winter. This is helping the dollar."

FRED DICKSON, CHIEF MARKET STRATEGIST, D.A. DAVIDSON & CO, LAKE OSWEGO, OREGON: "I think everybody expected a $10 billion cut in the rate of QE3 purchases to $55 billion, so there's no surprise there. "There was a high degree of speculation in terms of changing the Fed language, so there was some clarity on that point. "Probably the biggest takeaway was the Fed saying they would possibly consider maintaining monetary policy or interest rates lower than what they would normally be even when the Fed guideline targets of unemployment and inflation were hit. So the question becomes whether that would in fact create some inflation pressure."

THOMAS DI GALOMA, CO-HEAD FIXED INCOME RATES, ED&F MAN CAPITAL, NEW YORK "This statement from the Fed is as hawkish as it gets -- the only thing they did not do is (raise) rates today. The Fed is at neutral now and expect rate hikes to begin sometime in early 2015."

WAYNE KAUFMAN, CHIEF MARKET ANALYST, ROCKWELL SECURITIES, NEW YORK "So far this is just what the market wanted—the Fed staying accommodative. It doesn't look like too much has changed, although dropping the 6.5 percent unemployment rate might be a key issue. Yields are jumping up right now, which might be a sign that people think Yellen will tighten sooner rather than later, or that inflation could come into the market if the Fed keeps rates low well past 6.5 percent."

BRUCE McCAIN, CHIEF INVESTMENT STRATEGIST, KEY PRIVATE BANK, CLEVELAND, OHIO "At this point, there are relatively few surprises. I think in some sense, as the Fed tapers it becomes less important for the market. What becomes more important from here is whether the economy can recover its momentum once the weather issue thaws. One of the headlines I saw was that a majority of members do expect a rate hike. I think that's a little disappointing for investors. In addition, if we replace the 6.5 percent rate with a variety of indicators, that makes Fed actions less predictable, which adds to the market uncertainty."

PAUL MANGUS, HEAD OF EQUITY RESEARCH AND STRATEGY, WELLS FARGO PRIVATE BANK, CHARLOTTE, NORTH CAROLINA "The one difference I could see early on was a little bit more information on when and by how much the Fed may increase rates in 2015, which is a long way off yet. Other than that, we expected to hear more about a wider range of economic indicators beyond the unemployment rate and that was in the release, so that was not a surprise. The economic information that was supplied was also pretty much as expected, mentions of weaker labor markets earlier in the year due to weather conditions but showing signs of improving. Other areas of the economy are continuing to show signs of gradual improvement, but the Fed was looking for a much stronger economic background before it would start any type of tightening efforts, so it would continue to support liquidity in the marketplace."

MARKET REACTION:

STOCKS: U.S. stock indexes edge lower

BONDS: U.S. bond prices add to losses, yields rise

FOREX: U.S. dollar adds to gains against major currencies

(Americas Economics and Markets Desk; +1-646 223-6300) nL2N0MG1DJ

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