**MNI PRE-FOMC: Infl Rising But Too Soon to Tilt Hawkish

--Core PCE Prices Rose At 2.5% Annualized Pace in 1Q, Vs 1.9% in 4Q

--FOMC To Stand Pat in May Meeting; June Hike Odds At Over 90% 

--Expect Discussion on Longer Term Issues in Minutes

By Jean Yung

     WASHINGTON (MNI) - U.S. inflation may at last be on the cusp of hitting the

Federal Reserve's 2% target but it's likely too soon for the central bank to

hint at stepping up its pace of tightening over the rest of this year.

     The Federal Open Market Committee is almost certain to keep its target

range for the fed funds rate at 1.50% to 1.75% at the conclusion of its next

gathering Wednesday. Chances are too that it won't make many edits to its

post-meeting statement. There is no press conference or updated economic

projections at this meeting. 

     With market-implied odds for a June interest rate hike at over 90%,

according to CME Group's FedWatch Tool, officials don't need to do much to

convince markets they're ready to make another move soon. 

     Meanwhile, they still have months to judge how recent fiscal and monetary

moves transmit into economic activity, as well as how trade and geopolitical

tensions play out. Futures traders believe there is about as much of a chance of

three rate hikes this year as there are four -- the likely odds of each outcome

are currently around 40% -- meaning the FOMC also has plenty of optionality in

its pocket. 

     --HIGHER INFLATION 

     As a slew of factors holding down overall price levels drop out of the

equation this spring, inflation is picking up. 

     March data vindicates many Fed officials who have argued that the central

bank should look through last year's shortfall and press on with gradual

interest rate increases. The core personal consumption expenditures price index

rose at an annualized rate of 2.5% in the first quarter, compared to 1.9% in the

fourth quarter. The Cleveland Fed's Inflation Nowcast predicts headline PCE

inflation will reach 2% in March and April, with core price levels rising 1.9%

each month.

     But officials will make sure not to overreact to higher inflation in the

policy statement, as they want to emphasize that their inflation target is

symmetric. Some have said outright they would tolerate, even welcome, a mild

overshoot of the target. 

     "I am actually very comfortable going above the 2% by some amount -- 2.2,

2.3 -- I don't think that is a crisis of overheating necessarily," Atlanta Fed

President Raphael Bostic, a voting member, said earlier this month. 

     Unexciting wage growth also makes a case that a lower unemployment rate can

be sustained without leading to undue inflationary pressures, officials have

said. 

     --GROWTH SLOWDOWN TEMPORARY

     The Fed will likely look past a dip in economic growth in the first

quarter, as it did at this time last year, and maintain its expectations that an

expansive fiscal policy will juice the economy later in the year. 

     The U.S. economy grew at a 2.3% pace in January through March, the Commerce

Department said Friday, held down by weaker consumption and flat housing

activity and marking a slowdown from the torrid 4.0% pace of the prior quarter. 

     "I would not take much signal from the slowdown in consumer spending in the

first two months of this year," New York Fed President Bill Dudley stated

earlier this month. "As I see it, this slowdown was mostly due to two transitory

factors: a retrenchment following the spurt in activity from recovery efforts

following Hurricanes Harvey, Irma, and Maria, and the delay in this year's tax

refund payments to those receiving certain tax credits."

     Strong payroll gains also suggest that the weakness in household spending

will be temporary, Dudley added. The economy added an average of 202,000 jobs a

month in January through March, above 2017's monthly average of 182,000.

Analysts are expecting another strong report for April.

     --FRAMEWORK REVISIONS

     Absent a need to tilt expectations on the path of policy this year, the

FOMC may ramp up internal deliberations over if and when to revise its longer

run policy framework. 

     A number of policymakers have publicly ruminated over whether the Fed

should change its inflation objective to a range, a price level target or

another alternative. Another issue to be decided is whether the central bank

should return to the "corridor" system for implementing monetary policy or

retain the current "floor" system. 

     They are likely also to discuss regulatory matters, including whether to

activate a counter-cyclical capital buffer surcharge for large banks. Governor

Lael Brainard and Boston Fed President Eric Rosengren recently suggested it

might be appropriate to boost capital requirements in the late stages of an

economic expansion when financial stability risks are higher. 

     The Fed will likely wait until it released the minutes of the meeting in

late May to reveal details of these discussions.

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

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