**MNI POST-FOMC:Economy Signals Green Light For Rate Increases

--Forecast Rises to 4 Hikes For 2018; Stays At 3 For 2019

--IOER Increased By 20 Basis Points

--Deletes Forward Guidance that Rates to Stay Low For Some Time

By Sara Haire

     WASHINGTON (MNI) - Continued economic growth, lowered unemployment

expectations, and contained inflation appear to be underpinning the Fed's rosy

outlook for another two hikes in 2018, while longer-run expectations were little

changed as risks remain "roughly balanced."

     As expected, the Federal Open Market Committee unanimously raised rates by

25 basis points bringing the federal funds target range to 1.75% - 2.00% on

Wednesday following their June 12-13 meeting. However, not only was the

statement heavily revised, but so were their quarterly projections that show a

much rosier outlook for 2018 and 2019.

     Following the release, Federal Reserve Chairman Jerome Powell started his

press conference emphasizing that the economy is doing "very well," while

unemployment and inflation remain low with all signs indicating "gradual"

interest rate increases remain appropriate.

     Several adjustments to the statement indicated the Fed was optimistic about

the near and medium term outlook, unsurprising given the recent economic data

and developments. The statement noted that household spending has "picked up,"

which was supported by a solid gain in retail sales spending in May, as reported

Thursday morning.

     The Fed changed their outlook for economic activity to being "solid" from

"moderate," reinforced by their upward revisions for the median projection for

2018 GDP growth to 2.8% and core inflation to 2.0%, while also projecting a

lower unemployment rate of 3.6%.

     However, the longer-run median expectations for GDP, the unemployment rate,

inflation, and federal funds rate were all unchanged.

--POSITIVE NEAR-TERM REVISIONS

     The unemployment rate for the near-term was revised down two-tenths to

3.6%. Pair that with the mildly more hawkish statement could be cause for

concern that the Fed may be inclined to raise rates slightly faster to avoid

overheating and get back to the "natural rate of unemployment."

     However, in the press conference, Powell stressed the uncertainty bands

surrounding the Fed's projected natural rate of unemployment are particularly

wide. He also underscored that the natural rate may be lower than what is

currently anticipated and they will adjust accordingly.

     Historically, a tight labor market has yet to be sustained for longer than

a couple of years. Given this fact, the Fed may remain cautious before revising

their natural rate of unemployment, especially since they have not yet broken

into neutral interest rate territory.

     Slightly offsetting the optimism for the economic outlook are softer wage

growth, unusual given the historical pattern with an unemployment rate as low as

3.8%. Chair Powell called this a bit of a "puzzle."

     This acknowledgement of lower than expected wage growth could serve as a

slight offset to the slightly hawkish leaning statement. While inflation

measures have begun to show signs of upward movement, the slow pace of wage

growth suggests that there have not been enough signs of rapid acceleration for

the Fed to go past "gradual" increases.

--FORWARD GUIDANCE REMOVED

     Despite the positive near-term expectations for the year and statement

revisions, including one removal of "gradual" from the statement, the Federal

Reserve surprisingly kept the phrase "the stance of monetary policy remains

accommodative," a signal that they are going to continue to slowly dip their

toes into inching closer to a more neutral policy.

     Several policymakers have alluded to forward-guidance language being

revised soon; Fed Governor Lael Brainard summed it up best, calling it "stale"

in her May 31 speech. Unsurprisingly, the post-meeting policy statement removed

a crisis-era pledge to keep rates lower than the longer run levels, as it looked

forward to continued gradual tightening.

     The phrase itself became antiquated now that the longer-run fed funds rate

median expectation amongst the Committee is at 2.9% while the Committee expects

the fed funds rate to hover at or near 2.375% by the end of 2018 and 3.1% by

2019.

     Ahead of the FOMC decision Wednesday, markets had priced in just three

hikes for the year and about 1.5 hikes in 2019, according to MNI's PINCH tool.

     Monetary policy has a bad habit of falling behind the curve in terms of

acting to prevent an economic downturn, which could push the Fed to need to

tighten policy rapidly in the future in order to tame pricing pressures,

threatening the expansion.

     However, if they tighten policy too quickly before the economy is able to

sustain it, it could also cause an economic downturn.

     Powell noted that the economy can "always evolve in unexpected ways,"

reiterating the Fed's promise to take all incoming economic data and

developments into policy consideration. Though, the statement retained that

"risks appear roughly balanced."

--IOER TWEAK

     As expected, the FOMC also said Wednesday it would implement its 25 basis

point federal funds rate hike with a smaller-than-usual 20 basis point increase

in the IOER rate, a move intended to help keep the fed funds rate below the top

of the target range as recently the spread between IOER and the effective fed

funds rate has narrowed to 5 basis points.

     Since the target range was established in December 2008, the IOER rate has

been set at the top of the 25 basis point range. 

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

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