**MNI POST-FOMC: Fed Sticks to Its Guns on More Rate Hikes

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve on Wednesday said it remains

prepared to raise interest rates a few times next year even as it transitions to

a more flexible, data-dependent approach to policymaking.

     Chair Jay Powell conceded little in the face of enormous pressure from

markets and President Trump, reiterating the Fed's confidence in the upbeat

economic outlook and reaffirming the need for "some further gradual increases"

in rates. With above-trend growth and very low unemployment, the recent market

volatility and tightening in financial conditions "have not fundamentally

altered the outlook," Powell said. 

     There is "significant uncertainty" over both the policy path and the

endpoint of the current tightening cycle, the Fed chief said. But, having now

reached the "bottom end" of the range of estimates for the neutral rate, it

makes sense to watch the data closely and adjust policy accordingly. 

     --NOT SO DOVISH

     Anxious markets had expected a strongly dovish tone out of the December Fed

meeting, even contemplating the possibility that the Fed would get cold feet on

an already price-in rate increase.

     Instead, the Fed followed through on the fourth rate hike for the year and

made only a slight tweak to its forward guidance on gradual tightening. The

majority on the Federal Open Market Committee are still looking for two or more

rate increases next year, even as the median projection shifted down to two

hikes.  

     As long as the economy faces tailwinds including stimulative fiscal policy

and tight labor markets, the Fed will continue to remove monetary stimulus,

Powell said. 

     --TIGHTER FINANCIAL CONDITIONS

     The Fed's actions signal it does not want to be seen as too responsive to

financial markets. 

     The FOMC said Wednesday it would "continue to monitor global economic and

financial developments and assess their implications for the economic outlook,"

a reference to recent turmoil in equities and fears over slowing global growth

and trade uncertainty. But the phrase also reminds markets that the Fed cares

about asset prices only insofar as they actually translate into real economic

variables. 

     "What matters for the broader economy is material changes in a broad range

of financial conditions that are sustained for a period of time," Powell said. 

     Financial conditions have tightened and "have become less supportive of

growth," he said, but the modest revisions to the dot plot now incorporates

those changes. 

     "That's why the forecast for growth and inflation went down a little bit,"

he said. "So we also took down our rate forecast," and "we are going to be

watching carefully to see as those things develop." 

     --RESTRICTIVE STANCE

     It is now appropriate for Fed policy to be at neutral, but Powell remained

circumspect when asked to opine on when policy might move into restrictive

territory. 

     The FOMC projects rates to stand at 2.9% by the end of 2019, a tenth above

the committee's latest median estimate of the neutral rate at 2.8%. By 2020 and

2021, officials expect the fed funds rate to rise further to 3.1%. 

     But Powell stressed the range of views on whether it would be appropriate

to "go past neutral" and the "real uncertainty" about the "pace and destination"

for further rate increases.  

     Inflation has again surprised to the downside to end the year, albeit by a

small amount, he said, meaning the Fed has yet to declare mission accomplished

on half of its dual mandate. 

     "People have disparate views on what the endpoint could be," he said.

"Ultimately it will depend on what the circumstances are." 

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

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