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(H1) Fragile Outlook


Curve Lower, Flatter as Yields Reverse Off Cycle Highs


Yield Curve Update


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Probes Key Support

--Rates Stay Unchanged at 1.25%-1.50% at Conclusion of Jan Meeting
--Inflation 'Expected To Move Up This Year,' Stabilize at 2%
--Labor Market, Household Spending, Biz Fixed Invest 'Solid'
By Jean Yung
     WASHINGTON (MNI) - The Federal Reserve on Wednesday kept its 
benchmark interest rate unchanged, as expected, but warned that a robust 
economic outlook and rising inflation will necessitate "further gradual 
increases" in its benchmark policy rate. 
     The Federal Open Market Committee's post-meeting policy statement, 
Chair Janet Yellen's last, will reinforce market anticipation of another 
25 basis point interest rate hike as soon as the March meeting, 
followed by around two more hikes later in the year. 
     Earlier Wednesday, the CME Group's 30-Day fed fund futures prices 
showed about 75% of the market expecting a rate hike in March. Investors 
were pricing in a 0.69 percentage point increase in the fed funds rate 
by the end of the year, or close to three rate hikes.  
     The vote to keep the fed funds rate in the 1.25% to 1.50% target 
range at the January meeting was unanimous. 
     In the statement, the FOMC said that it "expects that economic 
conditions will evolve in a manner that will warrant further gradual 
increases in the federal funds rate," adding the word "further." 
Near-term risks to the outlook continued to appear "roughly balanced," 
it said. As in previous months, the committee noted "the stance of 
monetary policy remains accommodative, thereby supporting strong labor 
market conditions and a sustained return to 2 percent inflation." 
     The FOMC upgraded its assessment of inflation progress in several 
places in the statement. It explicitly stated that inflation "is 
expected to move up this year" despite remaining below the 2% target. 
     "Inflation on a 12-month basis is expected to move up this year and 
to stabilize around the Committees 2 percent objective over the medium 
term," the Fed said. 
     Market-based measures of inflation compensation "have increased in 
recent months but remain low," the FOMC said, while survey-based 
measures stayed little changed.      
     The Fed again repeated it is monitoring inflation developments 
     The Fed's assessment of current economic conditions was again 
optimistic. Economic activity has "been rising at a solid rate," with 
gains in employment, household spending and fixed investment all "solid" 
and the unemployment rate staying low.  
     The Bureau of Economic Analysis reported last week that GDP grew 
at 2.6% in the fourth quarter, a bit slower than analysts had expected 
though it topped the FOMC's projection of 2.5% for this year.
     The Labor Department is due to release its January jobs report 
Friday. Economists expect 190,000 in new payrolls, bringing the 
unemployment rate down another tenth to 4.0%, a fresh 17-year low. 
     Fed Gov. Jay Powell will take over the chairmanship of the FOMC 
effective Feb. 3, the Fed said in a statement Wednesday. He will be 
sworn in Feb. 5 at 9 a.m. ET. 
     Although the Fed has publicly and privately discussed possible 
changes to its longer term monetary policy framework in recent weeks, on 
Wednesday it reaffirmed its policy strategy first adopted in January 
--MNI Washington Bureau; tel: +1 202-371-2121; email: 
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