Following the release of the FOMC minutes for the June meeting, the theme was clearly uncertainty. For a number of participants there has been a resounding theme of hesitation when it comes to recent developments in the economy. That uncertainty, revealed in discussions about the neutral fed funds rate along with topics such as the Brexit vote and continued low business investment, has left many participants unwilling to give any definitive thoughts on an impending rate hike.
With respect to Brexit, the theme was that it would take a while longer to fully understand its implications for the U.S. economic outlook. For example, Dudley said “it’s hard to know if [Brexit is] a big cloud or a little cloud at this point” because “it’s really still early days to understand what sort of consequences [Brexit is] going to have.” He noted that, “if there is broad contagion through financial markets…then it could have more significant consequences.” Tarullo echoed this view, pointing to the uncertainty of the magnitude and duration of effects: “there will be some inhibiting effect, particularly in the U.K. and the eurozone, on investment and maybe on household behavior…none of us really knows the magnitude of it. And I doubt that there will be a moment where people say, well, OK, we don’t have to—Brexit is done.” Still, Williams and Mester offered more optimistic views about the effect of the Brexit vote, with Williams noting that the vote “hasn’t really been any bigger that you might expect, given the news.” He added that “it doesn’t seem quite a big deal for the U.S. economic outlook” and said “I would see the Brexit, as it’s played out so far, as being a relatively modest risk to the U.S. outlook.” Even with this more optimistic view, Williams had a similar policy conclusion: “Uncertainty that is going to be resolved in the near term makes an argument for being cautious. I think [Brexit] is one of those issues where the uncertainty may be lasting for a few years and it may be just part of the landscape we are operating under.” Mester, also on the more optimistic side, said “the real question for us, as U.S. monetary policy makers, is, has the medium-run outlook for the U.S. economy been materially changed?…I think the underlying fundamentals remain very solid for the U.S. economy.”
Brexit issues aside, FOMC participants continued to convey a sense of caution. Tarullo stated that “this is not an economy that’s running hot…this is an economy that has been moving forward in a gradual recovery, modestly above trend for some time now.” He stressed the need to wait, even without Brexit: “I have for some time now—this is not a
Brexit-driven issue—thought that it was the better course to wait to see more convincing evidence that inflation is moving towards and would remain around the 2% target…I look at this as an opportunity for greater maximum employment in a context in which inflation is not at our stated target, not near our stated target and hasn’t been so in quite some time.” Dudley sounded similar, emphasizing patience: “With uncertainties about the outlook and inflation being lower than desired, it allows us to be a little more patient.” Indeed, he also sounded cautious on inflation, which “is rising a bit because some of the earlier declines in energy prices are falling out of the data…but when you strip out the energy factor, inflation is still below what we would like.” On the other hand, Williams noted that “Being cautious forever would just lead us to need to raise rates much more aggressively in the future, and I think that could have some potentially negative consequences.” Most notably, he said if his expectations for growth (just under two percent) and inflation (continuing to move up) are met, then a rate hike would be warranted this year.