Fed policymakers show rising confidence on inflation

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Mester has previously discussed possible changes to the USA central bank's inflation-targeting regime in a similar speech in January but has not endorsed any one alternative.

Sal Guatieri, senior economist at BMO Capital Markets, said Friday's monetary report was "in line with further gradual rate hikes" although he said various sections could be read to support either an expected three hikes or possibly four hikes this year.

The release of Federal Reserve minutes first fuelled Wall Street gains, before flaming out as the market drew to a close on Wednesday sending stocks lower for the second straight session.

"We want more shock absorbers out there and really. the main shock absorber is the ability to reduce the fed funds rate, which means that you want to get to a higher inflation rate so that the pre-shock fed funds rate is 4 and not 2", said Paul Krugman, the Nobel Prize-winning economist and professor at City University of NY.

Market participants are still largely expecting the Fed to raise rates three times this year, beginning with its next meeting in March.

Despite the recent market turbulence, the Fed still held that overall vulnerabilities in the USA financial system remain moderate on balance. Investors are factoring other things in to the picture besides inflation and the rate of Fed tightening.

The U.S. Federal Reserve could begin to reassess its current monetary policy approach later this year but the threshold for changing to an alternative would be high, Cleveland Federal Reserve President Loretta Mester said on Friday.

Two days after the January meeting concluded, the Labor Department revealed that hourly wages during the month jumped at an annualized pace of 2.9%, the fastest growth rate since April 2009.

Heightened expectations for inflation and prospects for continued job growth have resulted in bond prices dropping. The Consumer Price Index gained 0.5% in January, more than economists' average estimate.

In anticipation of higher interest rates, investors have sold off government debt.

Wednesday's minutes (https://www.federalreserve.gov/monetarypolicy/fomcminutes20180131.htm) sparked a downdraft in equities as the yield of the 10-year Treasury note hit a fresh four-year high above 2.956%, undercutting appetite for assets perceived as risky like stocks. The yield on the two-year Treasury note, which is more sensitive to Fed policy, has reached its highest level in almost a decade.

The Fed's semiannual report to Congress on monetary policy was released ahead of new Chairman Jerome Powell's first public outing next week, when he will testify separately before House and Senate committees. On the Nasdaq, 1,801 issues rose and 487 fell. Powell could be very different from Yellen, she said. "There is no way the economy can be growing at 3%, as it is now, without the 10 year yield also going up but this is like a high-quality problem", Cote said.

Questions related to Powell's stewardship of the Fed remain, especially given recent signs of inflation growth and volatility in the stock market.