REPEAT: MNI FED STATE OF PLAY: Tweaks to Dots; Bal Sheet Start

--Repeating File Initially Sent At 5:12 PM ET Sunday

--Expected to Hold Target Range for Fed Funds Rate at 1.00%-1.25% 

--Dot Plot Likely Little Changed While FOMC Awaits Infl Progress

--Unlikely to Downgrade Medium-Term Growth Forecasts Due to Hurricanes 

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve officials are all but certain to

announce a long-awaited program to shrink their $4.5 trillion balance sheet

Wednesday. With little doubt on the balance sheet, the key unknown facing

markets is how policymakers frame the outlook for future rate hikes at a time

when inflation has fallen short.

     The rate-setting Federal Open Market Committee is due to update its

quarterly Summary of Economic Projections, or dot plot, at the conclusion of its

policy meeting Wednesday. Markets are skeptical the Fed can sustain the

quarterly pace of tightening when inflation has been so soft. Consequently, some

investors argue, the Fed should guide the 2018 rate outlook lower. 

     Arguing against such a revision: continued strength in the labor market but

also stronger-than-expected inflation data and above-trend growth prospects.

     The consumer price index surprised forecasters last week by accelerating to

1.9% in August, after five consecutive months of underperformance. Core CPI,

which excludes volatile food and energy prices, also held at 1.7%, better than

analysts expected and bolstered by broad-based increases including rising

housing and medical costs.

     That sort of data will vindicate Fed Chair Janet Yellen, who has argued

that recent weak inflation data were likely to be transitory. 

     Yellen and other policymakers have emphasized they expect a tight labor

market to drive price pressures down the road, and that recent rate hikes reduce

the threat of a sharp rise in inflation as the expansion matures.

     But some FOMC members have indicated they would be inclined to leave rates

on hold until inflation firms, saying they can afford to be patient amid strong

growth and a strong labor market. That longer-term inflation expectations remain

little change also helps, though some have publicly worried about the risk to

the Fed's credibility if inflation continues to fail to hit 2%. 

     "Participants agreed that a fall in longer-term inflation expectations

would be undesirable, but they differed in their assessments of whether

inflation expectations were well anchored," the minutes of the July FOMC meeting

said. 

     "One participant pointed to the stability of a number of measures of

inflation expectations in recent months, but a few others suggested that

continuing low inflation expectations may have been a factor putting downward

pressure on inflation or that inflation expectations might need to be bolstered

in order to ensure their consistency with the Committee's longer-term inflation

objective." 

     If inflation continues its recovery and growth holds steady, Fed officials

may turn to tightening labor markets and favorable financial conditions and

consider another rate rise as soon as December.

     There is one wrinkle to the outlook. Damage from an unusually destructive

hurricane season could shave third quarter economic growth by "a touch,"

according to New York Fed president Bill Dudley. The upward revision to second

quarter GDP growth due to an acceleration in consumer spending and

nonresidential fixed investment bodes well for the rest of the year and should

have pulled forecasts higher if it weren't for the storms. 

     But the impact of weather disruptions would reverse by winter as regional

rebuilding gets underway. Fed officials are unlikely to alter their medium-term

expectations because of hurricane damage.

--MNI Washington Bureau; tel: +1 202-371-2121; email: kevin.kastner@marketnews.com

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