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