REPEAT: MNI POST-FOMC: Economic Strength Points To Sept Hike

--Language Upgrades Show Economy Is "Strong"

By Sara Haire

     WASHINGTON (MNI) - The Federal Reserve on Wednesday unsurprisingly kept the

target range at 1.75%-2.00% and modified very little within the post-policy

meeting statement. The few changes to the language only further cemented

expectations for a September rate hike, but still left room for deciding on a

fourth hike this year to see how conditions progress.

     The statement changes focused on updating the language about economic

activity to reflect the observed strength. The statement said economic activity

was "strong," an upgrade from "solid" in June, and from "moderate" in previous

statements.

     Additionally, the statement noted that household spending and business

fixed investment have "grown strongly." Business fixed investment was already

reportedly strong in the June statement, but household spending has only been

said to have "picked up" previously. The upgrade likely reflects the solid data

on retail sales and the personal consumption indicators.

--NOT SOLD ON TWO HIKES

     Despite these adjustments, Lee Ferridge, Head of Macro Strategy for North

America at State Street Global Markets told MNI that he is "still not convinced

we get the second one" and that there is enough uncertainty that the second hike

"isn't baked in."

     Following the meeting, the MNI PINCH model showed expectations did not

shift much, with the expectation of a rate hike in September remaining at 95%

and December at 69%. However, Ferridge thinks the odds are more like 50/50 for

the December hike and that the markets will have to wait for the data in the

second half of the year before fully pricing it in.

     Consumption was strong in the second quarter, but that was likely due to

the boost from the tax cuts and will later filter out without meaningful wage

increases, Ferridge explained.

     There could be a number of headwinds that are afoot for the latter half of

the year, including whether growth meets expectations and the effect the tariffs

will have on the economy. The FOMC likely discussed the potential headwinds and

those discussions will be reflected in the August 22 FOMC minutes of Wednesday's

meeting.

     Additionally, inflation has not picked up yet to move past the 2% symmetric

objective and the Fed may take note of that in coming months as they would not

want to push inflation down before being sustained at 2%.

     Recent revisions to the personal Income data showed that the core PCE price

index year/year, the Fed's preferred measure of inflation, only touched 2% in

March on base effects and has not hit 2% again since then. 

--POLICY REMAINS ACCOMMODATIVE

     "The stance of monetary policy remains accommodative, thereby supporting

strong labor market conditions and a sustained return to 2 percent inflation,"

the statement said.

     There had been discussions over whether this phrase would be modified at

the June meeting, but they chose not to do it then or again in August. However,

as the interest rate continues its upward climb to reach neutral, this language

will need to be updated.

     Not updating it is still a good sign for markets as the Fed continues to

monitor the data and respond accordingly, careful to not commit to removing

accommodation too quickly.

--OUTLOOK LITTLE CHANGED

     The FOMC did not update their risks to the outlook, instead choosing to

repeat that "risks to the economic outlook appear roughly balanced."

     Fed Chair Jay Powell had reiterated the positive economic outlook in his

Congressional testimony and that sentiment was echoed once again in this policy

statement.

     Job growth remained strong "on average," the FOMC said, a reference to

strong payrolls and the unemployment rate remaining historically low, however

there was no mention of wage growth within the statement unsurprisingly.

     Currently, it is expected that the July payrolls will be strong, but

slightly softer than May and June's large gains.

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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