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Repeats Story Initially Transmitted at 20:20 GMT May 3/16:20 EST May 3
By Jean Yung
     WASHINGTON (MNI) - Facing low unemployment and inflation close to target
for the first time in years, the Federal Reserve appears content to remain on
the path of a gradual withdrawal of crisis-era stimulus for now. But how long
can it rest on its laurels? 
     As expected, the Federal Open Market Committee left interest rates
untouched at the conclusion of the May meeting. With core PCE inflation just a
tenth off 2% and gaining momentum, policymakers finally retired a years-long
pledge to monitor inflation developments closely, declaring instead that
inflation was expected to "run near the Committee's symmetric 2 percent
objective over the medium term." 
     With "further gradual adjustments in the stance of monetary policy,
economic activity will expand at a moderate pace in the medium term and labor
market conditions will remain strong," the FOMC said, noting without
qualification that "risks to the economic outlook appear roughly balanced."  
     But having breathed a sigh of relief at achieving its symmetric inflation
objective, the question now becomes whether medium term economic conditions will
allow policymakers time to relax for long. 
     --'SYMMETRIC' TARGET
     Some $1.5 trillion in tax cuts and a $300 billion increase in the federal
budget are expected to boost growth and price pressures. Yet the FOMC on
Wednesday repeated that policy remains accommodative and is expected to stay
that way for some time. 
     The emphasis on the Fed's "symmetric" inflation target also suggests that
officials will treat themselves to some relaxation even if inflation creeps up
to 2.2% or 2.3% -- perhaps even as high as 2.5%. 
     But there is a chance that inflation could accelerate faster than
policymakers anticipate. As Fed Governor Lael Brainard and others have pointed
out, the Fed has little experience with a "shift in America's fiscal policy
stance from restraint to substantial stimulus in an economy close to full
employment." 
     With some one-off factors dropping out of the calculation, inflation on a
12-month basis rebounded in March, just before the fiscal stimulus is due to
hit. As the economy heats up, wage pressures could begin to bind. Contacts
across the country have reported to the Fed for months that businesses are
straining to fill vacancies. If firms are forced to raise wages faster than they
have been doing, that will feed demand and price pressure. 
     Meanwhile, the Trump administration's trade policy could create price
pressures of its own. An upward shock to demand could drive pressures on imports
that then ripple through the economy. Higher tariffs on steel and aluminum have
already had a palpable effect, according to the Fed's latest Beige Book report. 
     As economists often note, monetary policy operates with a lag. If the Fed
falls behind the curve, officials might need to tighten policy abruptly in the
future, a move that would risk jeopardizing the expansion. 
     --ANTICIPATING FASTER HIKES
     On the other hand, if officials raised rates too quickly, they also faces
the risk that inflation stays persistently below its 2% objective. 
     In the context of significantly weakened, albeit slowly rebounding,
inflation expectations, there may not be a case for a major acceleration in rate
hikes.
     Inflation has risen, but that's exactly what officials have been expecting
for the past year. And it may still be too soon for officials to reach final
conclusions about how the fiscal stimulus could speed a return of inflation. 
     The Fed is debating how best to strike a balance and stay clearheaded to
the risks on either side. At its next meeting in June, the FOMC may be weighed
in favor of a total of four hikes this year rather than the three it penciled in
in March. 
     But for now, the committee has decided not to send a strong message either
way. 
--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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