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REPEAT: MNI POST-FOMC: Fed Readies to Pick Up Pace on Rates

Repeats Story Initially Transmitted at 16:55 GMT Feb 1/11:55 EST Feb 1
--Hawkish Language in Jan Statement Sets Up 2018 Tightening
By Jean Yung
     WASHINGTON (MNI) - The Federal Reserve on Wednesday teed markets up for a
March interest rate increase and signaled it might have to pick up the pace of
rate hikes this year if the economy appeared to be en route to overheating. 
     As expected, the Federal Open Market Committee left the fed funds target
range unchanged at 1.25% and 1.50%, but it mildly surprised markets with a tweak
to its forward guidance, warning that "further" rate hikes might be warranted to
keep the economy expanding at a moderate pace and labor market conditions to
stay strong. 
     "The Committee expects that economic conditions will evolve in a manner
that will warrant further gradual increases in the federal funds rate; the
federal funds rate is likely to remain, for some time, below levels that are
expected to prevail in the longer run," the FOMC said. 
     With the fed funds futures market already pricing in a 0.69 percentage
point increase in the benchmark rate this year ahead of Wednesday's meeting,
very close to the FOMC's own projection, the insertion of the word would seem
unnecessary. Doing so hints at the FOMC's intention to add the option of
speeding up the pace of hikes this year as it keeps an eye on how the new tax
cuts will spur growth and inflation. 
     On the back of another solid quarter of GDP growth, the FOMC's assessment
of economic conditions was again optimistic. Consumption and investment growth
were "solid" in the past six weeks. 
     Meanwhile, the unemployment rate "has stayed low" and is expected to fall
further below its estimated natural rate this year. Analysts surveyed by MNI see
the jobless rate dipping another tenth to a fresh 17-year low of 4.0% in January
when the Labor Department releases its report Friday. Over the past year, it
fell 0.6 percentage point from 4.7% to 4.1%, already a very low rate by
historical standards. 
     The FOMC's near-term outlook on inflation seems to have also turned a
corner. The statement dropped the line about expecting inflation to "remain
somewhat below 2 percent in the near term," instead saying with added confidence
that inflation was expected "to move up this year." The FOMC also noted that
market-based measures of inflation compensation have "increased in recent
months". 
     Adding to that are loose financial conditions and depreciation in the
dollar that could further boost spending and feed through to higher inflation. 
     Another thorny question for the Fed is whether so-called r-star, or the
neutral policy rate, will rise over time. The FOMC currently estimates it to be
around 2.75%, only about five hikes away. Correspondingly, Fed officials expect
to raise rates just a tad over that terminal rate for this business cycle.
Markets currently see the terminal rate at about 2.5%.  
     A better outlook for productivity growth could raise the equilibrium rate.
However, Thursday's nonfarm productivity data pointed at an unexpected slowdown
in the fourth quarter. Productivity fell 0.1%, compared with a 0.7% gain
expected, though for the year as a whole, productivity was up 1.2% compared with
a 0.1% decline for all of 2016. The recent uptick in business fixed investment
could drive productivity higher, though, as the economists have pointed out,
jumps in productivity growth have not historically been forecastable. 
     The next CPI report will be released on Feb. 14, around the time that new
Chair Jay Powell will deliver his first semiannual monetary policy report to
Congress. 
     The release of the minutes of the January meeting on Feb. 21 could also
offer more insight into the January discussion. 
--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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