As far as Fed communication, it was mostly more of the same from the ready-to-go and patient camps last week. There is nevertheless more agreement on what each camp sees as the more important issue for the Committee, and it is about pace: slow, very slow.
Many FOMC participants shared their views on monetary policy last week, although many of their prepared remarks related to other topics. Yellen said that “we’re really not seeing meaningful upward pressure on inflation.” Kashkari echoed Yellen’s sentiment, saying that the “economy still has room to run before it overheats.”
Powell, like a few others, continued to argue for patience—”My thought is we can continue to be patient. Inflation is below our target and has been for five years. We are also in a global environment in which growth is weak and there are deflationary forces”—and saw “a path of gradual rate increases” as “the correct path.” Evans continued to be concerned about lower inflation, and noted that any worries about financial stability should be handled by regulators and not monetary policy. Kashkari shared this view, noting that rate hikes “‘can be a very very painful way of trying to depress what may or may not be a bubble.”
Lockhart said he backed the September FOMC decision not to raise rates: “it makes sense to see a little more evidence of progress toward our statutory policy objectives.” He said that “the national economy remains short of [the dual mandate objectives], but not by a lot.” He interpreted the wording “for the time being” in the statement as meaning that a hike could come “before long.” Although we see the December meeting as the next possible time for a rate hike, Lockhart argued that “we need to continue to reinforce the idea that November is a live meeting.”
In contrast, Fischer noted that “with unemployment now below 5 percent we’re beginning to see the fruits of a higher-pressure labor market,” adding that wage growth of “3 percent is a rate that’s consistent with a reasonable rate of inflation.” (Wage growth is currently around 2½%.) He also said he wasn’t comfortable with near-zero interest rates: “I don’t like it, but I don’t want to raise the interest rate too much.”
Likewise, Williams said that “it is getting harder and harder to justify interest rates being so incredibly low given where the U.S. economy is and where it is going.” He said that he supported a rate hike and that “the economy can handle that. I don’t think that would stall, slow or derail the economic expansion.” He worried that, “if you try to, in a way, get greedy and say, ‘Let’s see how low this will go,’ you set in motion a process that causes the economy to go in reverse…There are risks to pushing things too far.”
Harker said, “I tend to be in the camp of normalizing sooner, rather than later,” arguing that the stance of policy would remain accommodative even with a rate hike and that the FOMC should pursue a “shallow path” of rate increases. Mester and George separately defended their hawkish dissents, both noting that delaying the next rate hike could have adverse consequences. Mester presented a hawkish message, saying, “I view another small step on the gradual upward path as appropriate, not because I want to curtail the expansion, but because I believe gradually moving rates up as we continue to make progress on our goals will help prolong the expansion.” She continued, “The risks that have concerned the Committee, including the volatility in financial markets at the start of the year, economic weakness abroad, and the aftermath of the U.K. vote to leave the European Union, have subsided, and the economic expansion has proved to be resilient.”