MNI POST-FOMC: Fed Hikes Rates, Cuts "Accomodative"

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve on Wednesday raised rates as

expected and dropped a reference to "accommodative" monetary policy, signalling

the economy is strong enough to withstand rates that are likely headed higher

than markets currently estimate.

     The Federal Open Market Committee at its September meeting raised the

target range for the federal funds rate to 2% to 2.25% and reaffirmed

projections for another full point of hikes by the end of 2019. Futures markets

are pricing in just two hikes in 2019, one short of the Fed's expectations.

     In a single change to its policy statement, it removed "the stance of

monetary policy remains accommodative." This formulation had featured since it

began lifting rates from near-zero in 2015, reassuring investors monetary policy

would continue to support economic recovery. But interest rates are now heading

into the range of Fed estimates of their neutral level.

     "I think the point with 'accommodative' was that its useful life was over,"

Fed Chair Jay Powell said after the meeting. "The language now doesn't really

say anything that's important to the way the economy is thinking about policy

going forward."

     The FOMC remains on a mission to return interest rates "closer to levels

that are normal in a healthy economy," Powell said.

     --INFLATION NEAR GOAL

     Fed officials on Wednesday marked up growth forecast for the third time

this year as they assessed policy at a "particularly bright moment" for the

economy, Powell said.

     Tax cuts and government spending increases have boosted activity and

prompted a surge in business and consumer confidence, and "there's good reason

to expect that to continue."

     Despite speculation about President Donald Trump's successive rounds of

tariffs hurting growth or pressuring prices higher, "we're not seeing it yet" in

the data, Powell said. What the Fed is seeing, he added, are labor shortages and

a modest increase in wages, but largely stable prices.

     "Inflation is right around 2%," he said. "There's no sense of it moving up

really."

     --MODEST OVERSHOOT

     If the Fed continues on its projected path of rate increases over the next

few years, Powell acknowledged it was "very possible" policy could end up in a

restrictive posture and that the central bank could subsequently have to cut

rates back to neutral.

     The FOMC projects the federal funds rate to be 3.4% in 2020 and 2021,

nearly a half point above the median estimate of neutral at 3%.

     But Powell played down the significance of these forecasts, saying FOMC

members have "written down really modest overshoots, amounting to one rate hike,

which wouldn't have a big effect on the economy."

     Given the uncertainty surrounding predictions for several years out, Powell

said he focused on conditions that could cause the Fed to move quicker or slower

than it expects.

     "The main thing where we might need to move along a little bit quicker

would be if inflation surprises to the upside," he said.

     On the other hand, a "correction in financial markets or a slowing down in

the economy that's inconsistent with our forecast" would pose a downside risk,

he said.

     "I think we're always going to be adjusting monetary policy in light of

conditions on the ground," he said.

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

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