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REPEAT: MNI FED STATE OF PLAY: Debate Over Inflation Continues

Repeats Story Initially Transmitted at 12:15 GMT Oct 27/08:15 EST Oct 27
--Rates Expected to Remain in 1.00%-1.25% Target Range
--FOMC Likely Again to Note Inflation Remains Low; Economy Growing Moderately
--Too Soon to Factor In Effects of Proposed Tax Cuts 
By Jean Yung
     WASHINGTON (MNI) - Consumed with speculation over who will be the next
leader of the Federal Reserve, markets are giving relatively little attention to
the November Federal Open Market Committee meeting, in which the Fed is widely
expected to stand pat on interest rates. 
     Officials are likely to continue their vigorous debate over whether another
rate increase is needed this year even as inflation remains short of their 2%
goal. But with the economy evolving broadly as expected and labor markets
tightening further in the past six weeks, there is little reason why the 12 FOMC
members who in September said they were prepared to move forward with another
hike this year would change their minds. 
     Analysts surveyed by MNI expect the economy to have grown 2.7% in the third
quarter though estimates range widely between 1.9% and 3.3% due to uncertainty
over forecasts on government spending in the wake of hurricanes Harvey, Irma and
Maria. 
     The storms, which swept through the nation in rapid succession, caused
major business disruptions in Texas, Florida and elsewhere but failed to dampen
optimism, as the latest Fed Beige Book survey of businesses showed. Firms said
they did not expect any significant long-term setback, and if anything, the
rebuilding effort would be constrained by labor supply and raw materials costs. 
     The September jobs report was heavily impacted by the storms, with payrolls
declining by 33,000 as the restaurant industry alone recorded 105,000 fewer paid
workers. But even that could not get in the way of the unemployment rate falling
to a new multiyear low of 4.2%, a tenth below the FOMC's projected rate by
year-end. Wages also notched some healthy gains, rising by 0.5% in both August
and September. 
     The Fed's models say tightness in labor market tend to push up both wage
and price inflation over the medium term, and Chair Janet Yellen has continued
to reiterate her belief in that relationship, as have many of her colleagues. 
     As recently as Oct. 15, the Fed chair argued the Phillips Curve
relationship is still at work and the one-off factors that have held down
inflation this year will not persist. "With the ongoing strengthening of the
labor markets, I expect inflation to move higher next year. Most of my
colleagues on the FOMC agree," she said. 
     Other FOMC officials have wondered publicly whether structural factors such
as technological advances and disruptive business models have led to increased
competition have begun to leave a lasting imprint on inflation. At the same
time, they're also asking if the myriad transitory factors that have kept
inflation low in recent months are indeed transitory. 
     That debate is expected to continue at the November meeting. 
     Meanwhile, economic growth continues to run above potential and the
unemployment rate has dropped further below the FOMC's estimate of maximum
employment. Though Fed officials won't have the report in hand when their policy
meeting concludes next Wednesday, employment is expected to bounce back
healthily in October. 
     The House on Thursday also cleared a budget measure that would allow a tax
cut bill to pass Congress without Democratic support. House leaders are expected
to unveil the plan to cut as much as $1.5 trillion in taxes Wednesday with the
aim of delivering a bill before the end of the year. 
     If such a measure drives economic growth and inflation higher, the Fed
might have to speed up its pace of interest rate increases. But the FOMC has
made clear that it will not begin to factor in any fiscal stimulus before the
measures take clear shape. 
     With markets already betting heavily on a Dec. 13 rate hike, there is no
need for the FOMC to drop any overt hint about a move at the next meeting. Aside
from small updates to its review of the economy, expect the statement to stand
little changed from September. 
     The committee will likely repeat it is "monitoring inflation developments
closely," and again state that "Inflation on a 12-month basis is expected to
remain somewhat below 2 percent in the near term but to stabilize around the
Committee's 2 percent objective over the medium term." 
     Markets will have to wait until the minutes of the meeting are published
three weeks later for a look into the specifics of the debate. 
--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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