MNI PRE-FOMC: Surprises Unlikely At July 31-August 1 Meeting

By Sara Haire

     WASHINGTON (MNI) - The Federal Reserve is unlikely to indicate a change to

their gradual approach of removing accommodation at its off-quarterly meeting

July 31-August 1, remaining data-dependent toward future policy as the economy

is expected to stay on "solid footing" with the advance estimate for 2Q GDP at

4.1%, highest in four years, inflation near 2% and the unemployment rate at

historically low levels.

     In all likelihood, the FOMC will keep their current target range of 1.75%

to 2.00% and will not make too many edits to their post-meeting statement given

the significant changes to their statements following the May and June meetings.

     However, Fed Chair Jay Powell has dropped a few hints in recent weeks as to

what could be discussed at this upcoming meeting, some of which could translate

into small changes to the statement, offering more insight into the already

relatively-transparent FOMC.

--ACCOMMODATIVE OR NOT

     Powell reiterated at his Congressional testimony on July 17-18 that the

stance of monetary policy remains accommodative. However, he said the economy

continues to evolve, showing it no longer needs the supportive monetary policy

that it once did and that the Fed will continue to gradually remove such

accommodation.

     The median projection for the Fed funds rate to center on 3.125% at the end

of 2019 suggests policy will be pushing past what the Fed considers to be the

neutral interest rate of 2.9% next year. The median projection is for the funds

rate to end 2018 at 2.375%, suggesting two addition rate hikes this years.

     As a result, the Fed is likely to soon modify the language that states the

stance of monetary policy remains accommodative to indicate policy is getting

closer to neutral, perhaps as early as this meeting.

     However, policymakers seem to want to continue watching the economy develop

to avoid unnecessarily pumping the brakes on growth. Some policymakers have

disagreed on where neutral policy is and whether to pause hiking before reaching

it. The minutes should hold more insight on this discussion.

--MIXED TRADE OUTLOOK

     At the time of the June meeting, only the steel and aluminum tariffs were

implemented, but business contacts had already begun reporting fear over trade

policies, causing some to pause investing. Since then, the Trump administration

has implemented further tariffs on goods from several countries, which have been

met with retaliatory tariffs.

     The Beige Book to be used at this meeting was released on July 19 and

showed that manufacturers within all districts reported concern over tariffs and

many districts saw higher prices and supply disruptions, attributed to the

recent trade policies.

     President Trump and European Commission President Juncker announced July 25

that they were negotiating better deals and were committed to lowering tariffs

across the board. If this is the first domino to fall in the negotiations for

trade, there could be an unexpected upside to the outlook that could be taken

into account in this meeting.

     Several policymakers have said they have not seen significant macroeconomic

effects from tariffs, so it is unlikely trade policy will be addressed as an

explicit risk to the outlook, but there may be a mention of monitoring global

and financial developments.

--FRAMEWORK CHANGE DISCUSSION

     Framework discussions are more likely held during off-quarterly meetings

and since Powell mentioned during his testimony that the FOMC would begin

holding discussions very soon about whether to continue with the "floor" system

or to revert back to a "corridor" system, this could be on the horizon.

     Following the crisis, the FOMC decided to change the way the implementation

of monetary policy to a "floor" system, a more simple operating framework

compared to the previous "corridor" system. However, the issue of remaining in a

"floor" system has returned given the expansion entering its 10th year.

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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