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REPEAT: MNI PRE-FOMC: Surprises Unlikely At July 31-Aug 1 Meet 

Repeats Story Initially Transmitted at 15:15 GMT Jul 27/11:15 EST Jul 27
By Sara Haire
     WASHINGTON (MNI) - The Federal Reserve is unlikely to indicate a change to
their gradual approach of removing accommodation at its off-quarterly meeting
July 31-August 1, remaining data-dependent toward future policy as the economy
is expected to stay on "solid footing" with the advance estimate for 2Q GDP at
4.1%, highest in four years, inflation near 2% and the unemployment rate at
historically low levels.
     In all likelihood, the FOMC will keep their current target range of 1.75%
to 2.00% and will not make too many edits to their post-meeting statement given
the significant changes to their statements following the May and June meetings.
     However, Fed Chair Jay Powell has dropped a few hints in recent weeks as to
what could be discussed at this upcoming meeting, some of which could translate
into small changes to the statement, offering more insight into the already
relatively-transparent FOMC.
--ACCOMMODATIVE OR NOT
     Powell reiterated at his Congressional testimony on July 17-18 that the
stance of monetary policy remains accommodative. However, he said the economy
continues to evolve, showing it no longer needs the supportive monetary policy
that it once did and that the Fed will continue to gradually remove such
accommodation.
     The median projection for the Fed funds rate to center on 3.125% at the end
of 2019 suggests policy will be pushing past what the Fed considers to be the
neutral interest rate of 2.9% next year. The median projection is for the funds
rate to end 2018 at 2.375%, suggesting two addition rate hikes this years.
     As a result, the Fed is likely to soon modify the language that states the
stance of monetary policy remains accommodative to indicate policy is getting
closer to neutral, perhaps as early as this meeting.
     However, policymakers seem to want to continue watching the economy develop
to avoid unnecessarily pumping the brakes on growth. Some policymakers have
disagreed on where neutral policy is and whether to pause hiking before reaching
it. The minutes should hold more insight on this discussion.
--MIXED TRADE OUTLOOK
     At the time of the June meeting, only the steel and aluminum tariffs were
implemented, but business contacts had already begun reporting fear over trade
policies, causing some to pause investing. Since then, the Trump administration
has implemented further tariffs on goods from several countries, which have been
met with retaliatory tariffs.
     The Beige Book to be used at this meeting was released on July 19 and
showed that manufacturers within all districts reported concern over tariffs and
many districts saw higher prices and supply disruptions, attributed to the
recent trade policies.
     President Trump and European Commission President Juncker announced July 25
that they were negotiating better deals and were committed to lowering tariffs
across the board. If this is the first domino to fall in the negotiations for
trade, there could be an unexpected upside to the outlook that could be taken
into account in this meeting.
     Several policymakers have said they have not seen significant macroeconomic
effects from tariffs, so it is unlikely trade policy will be addressed as an
explicit risk to the outlook, but there may be a mention of monitoring global
and financial developments.
--FRAMEWORK CHANGE DISCUSSION
     Framework discussions are more likely held during off-quarterly meetings
and since Powell mentioned during his testimony that the FOMC would begin
holding discussions very soon about whether to continue with the "floor" system
or to revert back to a "corridor" system, this could be on the horizon.
     Following the crisis, the FOMC decided to change the way the implementation
of monetary policy to a "floor" system, a more simple operating framework
compared to the previous "corridor" system. However, the issue of remaining in a
"floor" system has returned given the expansion entering its 10th year.
--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com
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