MNI ANALYSIS: Fed Officials Agree On Monitoring Data

By Sara Haire

     WASHINGTON (MNI) - Most Federal Reserve system presidents agree on the need

to gradually raise interest rates but uncertainty over how best to measure the

degree of economic slack means monetary policy should be closely tied to

incoming data, Fed Chairman Jerome Powell said at the Jackson Hole monetary

forum on Friday.

     In a speech which came days after President Donald Trump criticized the Fed

for raising interest rates, Powell said there was no sign of inflationary

overheating but that the central bank would react energetically if this were to

occur.

     "While inflation has recently moved up near 2%, we have seen no clear sign

of an acceleration above 2%, and there does not seem to be an elevated risk of

overheating," he said in the speech. "If the strong growth in income and jobs

continues, further gradual increases in the target range for the federal funds

rate will likely be appropriate."

     Fed research indicates "no single, simple approach to monetary policy is

likely to be appropriate across a broad range of plausible scenarios," Powell

said, referring to uncertainty regarding estimates of full employment and of the

neutral rate of interest.

     "The diversity of views on the FOMC is one of the great virtues of our

system," Powell said. "Despite differing views on these questions and others, we

have a long institutional tradition of finding common ground in coalescing

around a policy stance."

     Cleveland Fed President Loretta Mester, on the relatively hawkish side of

the committee, told CNBC on Friday she views gradual increases in the Fed funds

rate as being a "very compelling case right now, given that we are accommodative

still on monetary policy."

     In contrast, St. Louis Fed Bank President Jim Bullard told CNBC he wants to

"stand pat where we are" and would "try to react to data as it comes in."

Bullard, a dove who has said interest rates are already past neutral, will not

be a voting member until 2019, when the Fed will be approaching its median

expectation for the "neutral" rate.

     Bullard told Bloomberg TV that the Fed should not knowingly do anything to

invert the yield curve.

     The closely-watched difference between 10- and 2-year Treasury bond yields

narrowed to 19 basis points after Powell's speech, the flattest since 2007.

Recent recessions have been preceded by the spread turning negative.

     But some economists argue that the yield curve has been depressed for

technical reasons and that it is not an unfailing indicator of a slowdown.

Atlanta Fed Bank President Raphael Bostic told Bloomberg TV Friday the yield

curve is "a signal, but it is one of many signals we look at." In her interview,

Mester said that while the curve was important, there could be "reason to think

longer-run rates [could] be lower in the future."

     Asked about Trump's criticism of the Fed, Bostic said he didn't think the

president was trying to set up the central bank to take the blame for a

potential downturn, saying that the central bank's officials "are doing all that

they can" to avoid an economic slowdown.

     Kansas City Fed Bank President Esther George has been more forthcoming,

telling CNBC Thursday evening that the Congress gave the Fed the independence

and ability to "make decisions even when they may be unpopular across various

aspects of the U.S. economy." When asked whether Trump affects her voting

decisions, George said "no."

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

[TOPICS: MMUFE$,M$U$$$]