MNI: Fed Monetary Policy Report: Infl Rising, Still Under 2%>

--Monetary Policy Report Provides Little New Information

--Powell To Testify Before House Committee Tuesday

By Kevin Kastner, Holly Stokes, and Sara Haire

     WASHINGTON (MNI) - The pace of inflation is expected to rise in the 

coming year, along with a labor market that is near or beyond full 

employment, so further gradual policy adjustments are the expectation, 

the semiannual policy report to Congress released by the Federal Reserve 

Friday showed. 

     The report precedes Fed Chairman Jerome Powell's testimony before 

Congress on February 27 and offers little beyond the minutes released by 

the Federal Open Market Committee on Wednesday. As a result, market 

analysts will likely look to Powell's testimony and answers to questions 

to glean any new insights.

--MONETARY POLICY CHANGES GRADUAL

     In the report, the Fed still sees the current stance of policy as 

"accommodative" and expects "further gradual adjustments" to policy, the 

same language it has used in its statements. It points to the Summary of 

Economic Projections from December, not updated with this report, for 

its short-run and longer-run expectations on policy. The Fed noted that 

policy will continue to be data-dependent. 

     The Fed also noted that since the fall, they have been drawing 

down the size of its balance sheet, though it remains somewhat elevated 

at about $4.4 trillion. 

     The Fed indicated that implementation of its new policy has 

progressed smoothly, owing to good communication.

     The report does discuss alternative monetary policy rules, but 

shows that prescriptions of policy based on current conditions would 

have the funds rate set at anywhere between zero and 3.0% in December 

depending on the rule. The actual funds rate after December stands at 

1.25% to 1.50%. 

     They also noted that had the rules been applied during the crisis, 

they would have called for sub-zero rates, an impossibility for FOMC 

policy makers.

--INFLATION STILL BELOW TARGET

     The Fed noted that the pace of inflation remains below the targets 

set by the FOMC. The report noted that some of the weakness can be 

attributed to one-off events, like a drop in wireless phone services 

earlier in the year, but suggested that the persistent low core 

inflation in the US remains "a puzzle." 

     However, the Fed acknowledged that while the pace of inflation 

remains below target, it did start to rise in the last few months of 

2017. It said that will continue to monitor inflation data and the 

outlook for inflation carefully.    

--GROWTH STRONGER, LABOR MARKETS TIGHT

     The report noted that the pace of GDP growth accelerated in 

late-2017, with consumer spending and business investment both rising. 

However, it noted the housing market has improved only slowly and the 

dollar depreciated further. 

     The labor market strengthened in the last half of 2017, as 

evidenced by solid payrolls growth on average and a dip in the 

unemployment rate to 4.1% in January 2018, lower than some participants' 

expectations for longer run unemployment. 

     The report noted that the labor market "appears to be near or a 

little beyond full employment at present." 

     Despite this improvement in the labor market, wages have risen only 

moderately. The report suggests that hiring remains strong and that 

serious labor shortages should have boosted the pace of wage increases. 

As it stands, though, the report suggest that wage growth was held down 

by a weaker pace of productivity. 

     The report noted that financial conditions have eased since 

mid-2017 due to the improved global growth outlook, even taking into 

account the sharp market gyrations in recent weeks.

--MNI Washington Bureau; tel: +1 202-371-2121;kevin.kastner@marketnews.com 

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