Lacker and Evans offered contrasting views of the implications of simple policy rules. Lacker drew support for a more rapid pace of normalization from Taylor rules that suggest that the funds rate should be “should be significantly higher than it is now,” centered between 1.5% and 3.3%.
That apparently depends of the specific policy rule, and specifically about the assumption about the real neutral funds rate. Evans said recent observations indicate that “today the neutral federal funds rate is even lower than its eventual long-run level,” This “strongly suggests that U.S. policy today is less expansionary than what is often calibrated from simple monetary policy rules.” Indeed, he noted that “the view among many Federal Open Market Committee (FOMC) participants is that today the neutral federal funds rate is even lower than its eventual long-run level, implying an even further adjustment to the degree of accommodation in the current stance of Policy.” As a result, “the risk now of overshooting our 2 percent inflation objective is lower—and the likelihood that we actually get to 2 percent is smaller—than what these rules would imply.”
Like Lacker, Rosengren voiced support for a faster pace of normalization, though for a very different reason. His concern is the threat to financial stability from holding rates too low for too long. That creates incentives to reach for yield and take on more risk than otherwise, making investors including depository institutions, vulnerable to downward shock, which could set off a sharper decline in these prices, rippling through financial system and leading to a tightening of credit. An argument against taking financial stability concerns into account with monetary policy is that doing so often involves compromising the dual mandate. Rosengren notes that, taking a forward-looking approach, this may not be the case: A somewhat faster move to rate normalization may defer somewhat how quickly we achieve the dual mandate goals of full employment and price stability, but could reduce the risk of a larger divergence from the dual mandate in the next downturn.”
Kashkari represented the “show me the inflation” camp last week. He said “I’m very interested to see core inflation…We haven’t seen it yet. That’s what I am looking for.”
Mester is part of the initial conditions camp and noted, in support of a return to normalization, that the economy is virtually at full employment and closing in on price stability. That suggests she might support a September hike, but in any case clearly favors at least one hike this year.
What was notable about Fischer in his Bloomberg interview last week was what he didn’t say, no repeating the surprisingly hawkish sentiment in a previous interview at Jackson Hole. But he also came close to endorsing negative policy rates as a policy instrument: “We’re a world where they seem to work,” at least work up to a certain point and then they become counterproductive.”