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

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