MNI PREVIEW: FOMC to Lower Dots, Prepare Runoffs Halt

By Jean Yung

     WASHINGTON (MNI) - New interest rate projections by Federal Reserve policy

makers on Wednesday are likely to show that heightened global economic and

financial uncertainty argues for only one or even no rate hikes this year and

next.

     Officials in December had penciled in one to three hikes this year, with

the median expecting two.

     The Federal Open Market Committee is also set to unveil the general

outlines of its plan to halt asset runoffs and stabilize the size of its balance

sheet later this year, though some key decisions will be left for future

meetings.

     Public remarks by Fed leadership since the January FOMC meeting have been

decisive. With little upward pressure on trend inflation and a wobbly start to

the year in consumer spending and jobs, the median projection for the policy

path is set to flatten.

     A number of factors would need to align for the Fed to resume raising

rates. Price pressures would need to show clear movement upward in a way that

cannot be ascribed to transitory forces. Geopolitical uncertainty and other risk

factors holding back growth would need to recede, and the still solid

fundamentals for the U.S. economy would need to be sustained.

     --STAYING PATIENT

     The FOMC is expected to maintain its "patient" guidance, signaling it will

keep the fed funds rate unchanged through the next several meetings while

policymakers await clarity on global financial and economic uncertainties.

     Senior Fed economists told MNI this month they aren't that worried the U.S.

slowdown is developing into anything worse. Slower growth abroad and softer U.S.

data could persuade some Fed officials to revise downward their growth forecasts

from December's estimate of 2.3% for 2019, but conditions for the year remain

"favorable," Chair Jay Powell has said.

     Weak retail sales at year-end could provide bearish signals on consumer

spending, while the 35-day partial government shutdown also had a wide impact.

But the three-month moving average rate of job growth remains at a healthy

186,000 and trend inflation has been steady at just under 2%.

     The FOMC in January removed its guidance about the timing or the direction

of the next move and will likely continue to cite global economic and financial

risks as reasons to be "patient."

     --BALANCE SHEET PLAN

     The FOMC has telegraphed that balance sheet normalization will come to an

end this year and is expected to provide more details at the conclusion of the

March meeting.

     The balance sheet will be considerably larger than its pre-crisis level due

to expanded demand for bank reserves as well as healthy growth in currency in

circulation. And having proven that administered rates offer effective interest

rate control, the Fed sees little appeal in reverting to a thin-reserves

framework.

     Officials consider the best available estimate of minimum reserves to be

roughly $1 trillion, compared to the current $1.7 trillion, but also want to

build in a substantial buffer to cover fluctuations in demand.

     After ending runoffs, the Fed could keep total liabilities constant and

allow organic growth of currency and other nonreserve liabilities to whittle

down the reserves pool at a much slower rate as officials feel their way to the

final "new normal" balance sheet.

     The FOMC will need to eventually address other details of its balance

sheet, including its ultimate composition and maturity profile as well as when

to call time on the gradual removal of reserves through growth in other

liability accounts.

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

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