REPEAT: FOMC Keeps Dec Hike in Play As Asset Runoff Begins Oct

--Median FFR Unchgd for '17, '18; 11 Mbrs See 1 More Hike This Yr 

--Longer Run Fed Funds Rate Falls to 2.8% Vs 3.0% in June 

--2017 Median Core Infl Fcast Down to 1.5% vs 1.7% June, Unempl 4.3% 

--Hurricanes Could Dampen Activity, Boost Infl; Effects Temporary

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve on Wednesday set into motion a

multi-year program to shrink its $4.5 trillion balance sheet and kept short-term

interest rates on hold, as expected. Updated forecasts and the post-meeting

policy statement also left a December rate increase on the table and signaled

confidence about the pace of planned hikes next year.

     The Federal Open Market Committee's updated quarterly forecasts call for a

fed funds rate in the 1.25% to 1.50% range by year-end, matching June's forecast

and representing one more rate increase this year. For 2018, the median

policymaker sees the benchmark rate in the 2.00% to 2.25% range, unchanged from

June, though those who had forecasted higher rates in June pared them back as

officials downgraded expected progress on their inflation target.

     Importantly, the FOMC's estimate of the longer run fed funds rate fell

two-tenths to 2.8%, indicating officials view the current stance of policy is

actually closer to neutral than policymakers thought in June.

     "The Committee expects that economic conditions will evolve in a manner

that will warrant gradual increases in the federal funds rate," the FOMC said in

its policy statement.

     Reinvestment of Treasuries and mortgage-backed securities on the Fed's

balance sheet will begin to be phased out in October, the FOMC said. The move

marks the start of a new chapter in the Fed's deployment of unconventional

policies to support the economy after the financial crisis and signals a gradual

pullback of monetary stimulus as rates move further away from zero.

     Thus far, markets have shown little concern about the plan officials

describe as passive and predictable. Instead they are more focused on the rate

guidance amid a midyear shortfall in inflation. Wednesday's Summary of Economic

Projections puts markets on notice that rate hikes remain an active part of the

Fed's toolkit.

     In the so-called dot plot, 11 FOMC members, including nonvoters, expect one

more hike to be appropriate this year, up from eight in June. Fewer members,

just one, viewed it appropriate to increase rates two more times this year. The

rest, four members, called for no more hikes this year, same as the June

forecast.

     The higher dots drifted lower in 2018 as well, but now six instead of five

officials are in the three-hike camp -- assuming 2017 concludes with another

hike. Four committee members are calling for two or fewer hikes and seven want

four or more hikes.

     Ahead of the meeting Wednesday, futures markets were pricing in a 56%

chance of a December increase and no more than two rate hikes between now and

the end of 2018, according to CME Group.

     In its policy statement, the FOMC again noted the soft inflation data,

reiterating that headline and core inflation had "declined" this year and are

"running below 2 percent."

     Officials forecast the core personal consumption expenditures price index,

their preferred measure of inflation, to reach just 1.5% by the end of the year,

down from 1.7% in the June projection. For 2018, core PCE is seen missing the 2%

goal by a hair, ending the year at 1.9% rather than reaching that target as the

FOMC had expected in June.

     "Inflation on a 12-month basis is expected to remain somewhat below 2

percent in the near term but to stabilize around the Committees 2 percent

objective over the medium term," it said, repeating language from the July

policy statement.

     The Fed also acknowledged the impact of an extraordinarily damaging

hurricane season, stating that "storm-related disruptions and rebuilding will

affect economic activity in the near term, but past experience suggests that the

storms are unlikely to materially alter the course of the national economy over

the medium term."

     Officials also acknowledged that "higher prices for gasoline and some other

items in the aftermath of the hurricanes will likely boost inflation

temporarily."

     Still, the Fed offered an upbeat assessment of current economic conditions,

noting job gains "have remained solid in recent months" while the unemployment

rate "has stayed low." Household spending and business fixed investment are also

expanding.

     They said near-term risks to the outlook appear "roughly balanced." And, as

it has for the past year, the FOMC stated: "the stance of monetary policy

remains accommodative, thereby supporting some further strengthening in labor

market conditions and a return to 2% inflation."

     Policymakers' median forecast for unemployment and the GDP growth outlook

moved up slightly compared to the June forecast. GDP growth was upgraded by

two-tenths to 2.4% for the year, then slowing to 2.1% in 2018, 2.0% in 2019 and

to its trend rate of 1.8% in 2020. The median year-end unemployment rate

expected was steady at 4.3% this year but is seen falling to 4.1% in 2018 and

2019, down by 0.1 percentage point. The longer run rate of unemployment remained

at 4.6%.

     The Fed also added a new year to its forecast horizon, projecting the fed

funds rate could rise to 2.9% that year, slightly above the estimate of its

longer run neutral rate.

     With the economy evolving broadly as expected and rates heading higher, the

FOMC said it is ready to begin implementing its balance sheet normalization

program.

     Building on the details the gradual unwind it first unveiled in June, the

Fed on Wednesday said rollover amounts will be allocated "across the month's

maturity dates in proportion to total maturities of SOMA Treasury holdings on

each date."

     Up to $6 billion of maturing Treasuries and $4 billion of MBS per month

will not be reinvested, starting on Oct. 31. The combined monthly cap will then

rise by $10 billion at three-month intervals over the next 12 months until it

reaches a ceiling of $50 billion per month. The normalization process will

continue until the Fed is "holding no more securities than necessary to

implement monetary policy efficiently and effectively," the specifics of which

officials have yet to define.

     In practice, the New York Fed has projected that actual runoff amounts are

not likely to reach these preset caps in most months as less debt is due than

the cap amount. Ultimately, the bank has said, the balance sheet could shrink to

a level between $2.4 trillion to $3.5 trillion, sometime between 2020 and 2023,

with the portfolio consisting primarily of Treasuries. That is still much

greater than its $900 billion size before the Great Recession.

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

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