MNI PREVIEW: Fed On Hold; Median Policy Path Drifts Lower

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve is expected to end the year in a

holding pattern, steadying rates at 1.50% to 1.75% amid little change in the

projected trajectory of the U.S. economy over the medium term.

     Fed Chair Jay Powell said in October it would take a "material

reassessment" of the FOMC's outlook to trigger further rate cuts. Though

downside risks related to global growth and trade policy have eased a tad, the

intervening weeks have seen no significant developments on data to warrant a

reconsideration of the modestly accommodative policy stance.

     Officials are also unlikely to revise the data-dependent forward guidance

in their policy statement, reiterating that uncertainties remain and the FOMC

will monitor the economy's performance to assess the appropriate path for its

benchmark rate.

     An update to the Summary of Economic Projections will illustrate how

opinions fall on the rates path in 2020 and beyond, but the median dots are

unlikely to hint at a reversal of this year's rate cuts in the near future.

Markets continue to price in one 25-basis-point reduction over the next year.

     --WATCH AND WAIT

     Recent public remarks indicate most Fed officials are content to wait and

see how 2019's cumulative 75 bps in rate cuts will support the economy going

forward. Policymakers have set a high bar to recalibrate interest rates.

     Since October, Powell and other senior officials have characterized

monetary policy as being "in a good place." The committee "would need to see a

really significant move up in inflation that's persistent before we would

consider raising rates to address inflation concerns," he said in October.

     PCE inflation has stayed below 2%, and FOMC projections may need to take

that into account by lowering expectations slightly over the forecast horizon.

Still, officials say they expect inflation to return to target over the medium

term.

     On the upside, weakness in growth and investment abroad shows few signs of

spilling over into the labor market, which continues to see payrolls gains

averaging 205,000 over the past three months, not far off the 223,000 last year.

Fed economists estimate only about 100,000 jobs need to be created each month to

keep pace with new entrants to the labor market. The unemployment rate continues

to sit at a 50-year low of 3.5%.

     The likelihood of a comprehensive trade deal with China, though it would

bode well for business confidence and exports, remains uncertain.

     --FRAMEWORK, REPO REVIEW

     Officials have begun staking out positions on proposed changes to the way

the FOMC targets inflation, though no decision is due until mid-2020.

     Governor Lael Brainard has laid out a method she called "flexible inflation

targeting," a softer, more pragmatic version of average inflation targeting.

Under that system, the Fed would be prepared, for example, to target 2%-2.5% for

a long period after a stretch of time during which inflation was below 2%, in

order to raise expectations for prices.

     Any move toward an inflation make-up strategy would be dovish for the fed

funds rate path.

     The committee is also debating how to deploy forward guidance and balance

sheet tools to combat the next crisis, including using more "robust" forms of

forward guidance such as yield curve control.

     No significant meaningful announcements regarding measures to address

funding pressures in overnight markets are expected, though Fed staff continue

to investigate ways to smooth policy implementation and money market

transmission, including the design of a standing repo facility.

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

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