MNI: FOMC: Hike 'Likely Soon;' Balance Sheet Policy in Play>

--'Premature' to Conclude Inflation Mandate Achieved

--Soon Need to Revise Forward Guidance Language

--To Make Technical Adjustment to Policy Implementation

By Jean Yung

     WASHINGTON (MNI) - Strong labor market conditions and firming price 

data reassured Federal Reserve officials at their May meeting that it 

would be appropriate to take another step in raising interest rates 

toward a neutral level, likely as soon as next month. 

     If the economy continued to evolve as they expected, "it would 

likely soon be appropriate for the Committee to take another step in 

removing policy accommodation," said the minutes of the May 1-2 Federal 

Open Market Committee gathering, released Wednesday after a typical 

three-week delay. The FOMC next meets on June 12-13. 

     A gradual approach to removing monetary stimulus remains 

appropriate for now, but as the federal funds rate converges on its 

longer-run normal level, policymakers said they would need to "soon" 

revise their forward guidance language in the statement, the minutes 

said. 

     Officials also noted a need to further discuss how the Fed 

implements monetary policy most effectively as the balance sheet runs 

down and as various factors have pushed the effective fed funds rate 

within 5 basis points of the upper bound of its target range. For now, 

they agreed to make a technical adjustment of the interest on excessive 

reserves rate "sooner rather than later," likely at a meeting when they 

raise interest rates again.

--INFLATION VICTORY 'PREMATURE'

     The FOMC voted to hold rates steady as expected in May but tweaked 

its policy statement with respect to inflation, adding a second 

reference to the Fed's "symmetric" inflation target and dropping a 

longstanding pledge that it is "monitoring inflation developments 

closely." 

     Wednesday's account of the meeting revealed that officials were 

cheered by recent progress toward their price stability target, which 

"appeared to support the view that the downside surprises last year were 

largely transitory." Some officials even noted that inflation was 

"likely to modestly overshoot 2 percent for a time" and noted that such 

a temporary overshoot "would be consistent with the Committee's 

symmetric inflation objective" and would help anchor longer-run 

inflation expectations. 

     However, policymakers also appeared cautious. They noted that "it 

was premature to conclude that inflation would remain at levels around 2 

percent," especially as inflation had run persistently under that 

objective for a number of years. 

     Several officials believed that the recent acceleration in price 

rises "may have represented transitory price changes" in health care and 

financial services and that inflation expectations remained below those 

consistent with the PCE inflation index staying around 2%. 

--FORWARD GUIDANCE UPDATE 

     As the target range for the fed funds rate continued to march 

higher, more Fed officials are calling for a discussion over how to 

revise their forward guidance language "in coming meetings." 

     Since the Great Recession, the FOMC has promised that the fed funds 

rate "is likely to remain, for some time, below levels that are expected 

to prevail in the longer run" and stated that "the stance of monetary 

policy remains accommodative." 

     A few officials believe the neutral level of the fed funds rate 

"might currently be lower than their estimates of its longer-run level" 

and therefore "it might soon be appropriate to revise the 

forward-guidance language in the statement." 

     However, the minutes noted that there are a range of views on the 

amount of policy firming needed to hit neutral over the medium term. 

According to the Summary of Economic Projections in March, officials 

estimated the longer run neutral rate at between 2.3% and 3.5%. The 

current target range for the fed funds rate is 1.50% to 1.75% and 

expected to reach 2.9% by the end of 2019. 

--POLICY IMPLEMENTATION FRAMEWORK

     In light of the effective funds rate rising to just 5 basis points 

shy of the upper bound of the Fed's target range in May, policymakers 

agreed that it would be appropriate to make a "small technical 

adjustment" in their approach to implementing monetary policy, saving a 

larger discussion over their policy framework for a later meeting. 

     At a time when the FOMC increases its target range for the fed 

funds rate by 25 basis points, the Fed could set the interest on excess 

reserve rate "modestly below the top of the target range," perhaps by 20 

basis points, the minutes said. 

     An increase in Treasury bill issuance and a resulting higher demand 

for repo financing had put some pressure on the fed funds rate. Though 

that pressure "could be expected to fade over coming weeks," the 

Committee should further discuss how it can implement monetary policy 

most effectively and efficiently when the quantity of reserve balances 

reaches a level "appreciably below" that seen in recent years "before 

too long," the minutes said.   

--MNI Washington Bureau; tel: +1 202-371-2121; email: jean.yung@marketnews.com 

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