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--Inflation, Rates Projections Left Largely Intact Despite Faster Growth
--Median FOMC Forecast Remains at 3 Hikes in 2018, 2 in 2019
--Nearly All Officials Factored Tax Cuts Into Forecasts
By Jean Yung
     WASHINGTON (MNI) - It would have only taken three of 16 Federal Reserve
officials to conclude that faster growth and lower unemployment implied higher
interest rates to lift the Fed's rates outlook for 2018, yet officials Wednesday
surprised some investors by leaving the median dots where they were next year
and in 2019, even as their outlook for growth and employment improved. 
     With nearly all members of the Federal Open Market Committee factoring into
their projections the prospect of a fiscal stimulus along the lines of what
Congress is contemplating, expected GDP growth rose to 2.5% next year,
four-tenths better than the FOMC's September forecast and seven-tenths above the
economy's longer run growth rate. 
     The jobless rate, already below the FOMC's estimate of full employment, is
now expected to sink further to 3.9% in 2018 and 2019. But inflation forecasts
remained unchanged, rising to the Fed's 2% target by 2019, same as in the
September set of forecasts. 
     With no output gap or employment gap, the median policymaker continued to
see three quarter-point interest rate increases next year followed by two in
2019, the same as in September.
     Fed officials appear to be signaling stronger confidence in the economy's
ability to grow without stoking inflation. That would go hand in hand with a
move away from the Phillips Curve framework -- that there is a relationship
between the degree of slack in the labor market and inflation. 
     Ahead of the FOMC decision, 10-year yields hit 2.43% on the prospect that
officials might signal an accelerated pace of tightening next year. Yields
backed off to 2.35% as Yellen concluded her final press conference, partly on
the Fed's less-than-hawkish sentiment regarding 2018. 
     Asked if there was some inherent discrepancy in the FOMC's newest
forecasts, Chair Janet Yellen cautioned that the forecasts are a composite of 16
varying viewpoints and should not be read as that of one individual but also
nodded to the fact that some officials are "rethinking" what's determining
     "You are looking at 16 participants who have made adjustments to their
economic outlook for a whole variety of reasons, including in some cases
rethinking some of the fundamentals that went into their original forecast," she
     "Growth is a little stronger, the unemployment rate runs a little bit
lower, that would perhaps push in the direction of slightly tighter monetary
policy," she continued. "But again, counterbalancing that is that inflation has
run lower than we expect, and it could take a longer period of a very strong
labor market in order to achieve the inflation objective." 
     One indication of a weaker Phillips Curve relationship is wage pressures,
which have remained "modest," the chair said. 
     "That's one factor -- along with the fact that inflation remains low --
that gives the feeling that even though we have a 4.1% unemployment rate, that
the labor market is not overheated at this point."
     Neither did policymakers raise their projection for potential growth of the
economy, implying they don't expect the tax package to significantly boost
productivity growth over the long run. 
     Yellen said the FOMC sees mainly a demand effect from the corporate tax
cuts, though higher business investment could in turn boost capital formation
and spur productivity growth. Still, she added, "there is a good deal of
uncertainty about what the impacts would be." 
     A larger than expected impact on potential GDP growth would be "welcome" in
an economy that's had "disturbingly low productivity growth," she said, and it
"could support faster GDP growth at least for some period without creating the
need to tighten monetary policy to offset that." 
     For now, Yellen reiterated that the FOMC still judges transitory factors
unrelated to the broader macroeconomic outlook as holding inflation down, but
she again brought up the uncertainty clouding the inflation conundrum. 
     "I have tried to be straightforward in saying that this could end up being
something that is more ingrained and turns out to be permanent," she said. "It's
very important to watch it. And if necessary, rethink what's determining
     One possibility, she added, is that estimates of the longer run sustainable
rate of unemployment "need to come down even more," or that inflation
expectations have slipped, though that is not her own judgment.  
     "I think it's important to watch inflation outcomes carefully. And, if we
don't see inflation moving in the manner that the committee anticipates, to
alter policy so that we do achieve our 2% objective," she said.  
     However, "At the moment, most of my colleagues and I believe we are on
track to achieve it." 
     That could change, and it would mean a more dovish arc for the Fed over the
long run than investors expect. 
--MNI Washington Bureau; +1 202-371-2121; email:
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