In a discussion of low interest rates, Fischer pointed to secular forces holding down interest rates (such as aging of the population, low productivity growth, and weak investment). This could make setting monetary policy more difficult by increasing the frequency that the FOMC faces the effective lower bound and could threaten financial stability by promoting “reaching for yield” behavior. But he also noted that non-monetary policy measures could ameliorate the situation. Regarding near-term policy, while he was answering questions he said that–while he would find it acceptable to undershoot NAIRU by a few tenths–he did not want to wait for the inflation data to give a signal as that would be too late: “If you go below people’s estimates of the full employment rate by a couple of tenths of [a] percentage point I don’t think there’s any danger in that, but saying we should keep going until the inflation rate shows us we’re wrong then you’re going to change too late.”
Dudley, the other member of the so-called core (Yellen, Fischer, and Dudley) who spoke this week, made clear his expectation of a rate hike this year, which we see as meaning December: “if the economy stays on the current trajectory, I do expect to see an increase later this year.” Like Fischer, he saw some further room for the labor market to improve, so his comment about not seeing urgency to tighten likely referred to the very gradual pace of rate hikes thereafter: “We’re not yet at maximum sustainable employment…I don’t see that urgency to tighten monetary policy aggressively.”
Williams sounded slightly more hawkish than Fischer and Dudley. On separate occasions, Williams stressed that returning to a gradual pace of rate hikes soon would allow for a smoother course of normalization: “an earlier start to raising rates would allow a smoother, more gradual process of normalization. This gives us space to fine-tune our responses to any surprise changes in economic conditions. If we wait too long, the need to play catch-up wouldn’t leave much room for maneuver.” Later, he said: “Given the progress we have made and signs of continued solid momentum in the economy, and consistent with our agreed-upon monetary policy approach, it makes sense for the Fed to gradually move interest rates toward more-normal levels.”