**MNI POST-FOMC: Infl Near Target But How Long Can Fed Relax?

By Jean Yung

     WASHINGTON (MNI) - Facing low unemployment and inflation close to target

for the first time in years, the Federal Reserve appears content to remain on

the path of a gradual withdrawal of crisis-era stimulus for now. But how long

can it rest on its laurels? 

     As expected, the Federal Open Market Committee left interest rates

untouched at the conclusion of the May meeting. With core PCE inflation just a

tenth off 2% and gaining momentum, policymakers finally retired a years-long

pledge to monitor inflation developments closely, declaring instead that

inflation was expected to "run near the Committee's symmetric 2 percent

objective over the medium term." 

     With "further gradual adjustments in the stance of monetary policy,

economic activity will expand at a moderate pace in the medium term and labor

market conditions will remain strong," the FOMC said, noting without

qualification that "risks to the economic outlook appear roughly balanced."  

     But having breathed a sigh of relief at achieving its symmetric inflation

objective, the question now becomes whether medium term economic conditions will

allow policymakers time to relax for long. 

     --'SYMMETRIC' TARGET

     Some $1.5 trillion in tax cuts and a $300 billion increase in the federal

budget are expected to boost growth and price pressures. Yet the FOMC on

Wednesday repeated that policy remains accommodative and is expected to stay

that way for some time. 

     The emphasis on the Fed's "symmetric" inflation target also suggests that

officials will treat themselves to some relaxation even if inflation creeps up

to 2.2% or 2.3% -- perhaps even as high as 2.5%. 

     But there is a chance that inflation could accelerate faster than

policymakers anticipate. As Fed Governor Lael Brainard and others have pointed

out, the Fed has little experience with a "shift in America's fiscal policy

stance from restraint to substantial stimulus in an economy close to full

employment." 

     With some one-off factors dropping out of the calculation, inflation on a

12-month basis rebounded in March, just before the fiscal stimulus is due to

hit. As the economy heats up, wage pressures could begin to bind. Contacts

across the country have reported to the Fed for months that businesses are

straining to fill vacancies. If firms are forced to raise wages faster than they

have been doing, that will feed demand and price pressure. 

     Meanwhile, the Trump administration's trade policy could create price

pressures of its own. An upward shock to demand could drive pressures on imports

that then ripple through the economy. Higher tariffs on steel and aluminum have

already had a palpable effect, according to the Fed's latest Beige Book report. 

     As economists often note, monetary policy operates with a lag. If the Fed

falls behind the curve, officials might need to tighten policy abruptly in the

future, a move that would risk jeopardizing the expansion. 

     --ANTICIPATING FASTER HIKES

     On the other hand, if officials raised rates too quickly, they also faces

the risk that inflation stays persistently below its 2% objective. 

     In the context of significantly weakened, albeit slowly rebounding,

inflation expectations, there may not be a case for a major acceleration in rate

hikes.

     Inflation has risen, but that's exactly what officials have been expecting

for the past year. And it may still be too soon for officials to reach final

conclusions about how the fiscal stimulus could speed a return of inflation. 

     The Fed is debating how best to strike a balance and stay clearheaded to

the risks on either side. At its next meeting in June, the FOMC may be weighed

in favor of a total of four hikes this year rather than the three it penciled in

in March. 

     But for now, the committee has decided not to send a strong message either

way. 

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

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