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JPY Stronger After Spate Of Stronger Data

US TSYS

Light Support From Downtick In NASDAQ Futures

--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$$$,MT$$$$]