FOMC participants continued to hold divergent views of inflation prospects and the implications for the timing of further rate hikes. Williams saw inflation as being pulled down by “transitory factors” and focused on the overheating risk posed by what is a “very strong” labor market as suggested by U-3 being below the NAIRU by “a fair amount.” Dudley argued that recently favorable financial conditions warrant considering additional policy tightening: “For example, when financial conditions tighten sharply, this may mean that monetary policy may need to be tightened by less or even loosened. On the other hand, when financial conditions ease—as has been the case recently—this can provide additional impetus for the decision to continue to remove monetary policy accommodation.” Bullard saw the median projected rate path (the dots) as “unnecessarily aggressive.” Evans, who has long held some of the most dovish views, warned that “last week’s Consumer Price Index (CPI) data do not bode well for PCE inflation in May.” He was concerned that “We have to assure the public that we recognize the new low-inflation environment and that we are not overly conservative central bankers who see our inflation target as a ceiling.” In his view, this necessitated “very gradual” rate hikes. More specifically, he stressed that there was no urgency to hike rates again in the near term, since the FOMC has already raised rates twice this year: “We can go until December and make a judgment that maybe three is the right number, maybe two is the right number. So I think we’ve got time.” Kaplan was also hesitant to commit to the next hike coming sooner rather than later. He wanted “to see evidence” that recent weakness was transitory and was “willing to be patient,” but he also warned: “You can’t wait for signs of overheating of inflation…[timing the net hike is] a risk management exercise.” In his first policy comments as Atlanta Fed President, Bostic pointed to the discrepancy between survey-based confidence measures and actual economic activity: “Typically what happens is if confidence goes up, spending goes up and we haven’t seen that…So there’s a disconnect. I think we are actually seeing, to some extent, a playing out of psychology, of the collective psyche that is leading to a different outcome than we would expect…Is it transient, something that is idiosyncratic to a certain period? Or are we seeing something more fundamental? And that is the million dollar question.”
There was general agreement that balance sheet reduction should begin later this year. Evans argued for “slow, preset” reductions in the balance sheet. Harker explicitly tied the timing of balance sheet reduction to that of the next rate hikes, advocating a pause: “It is prudent for us to pause on the next rate increase; at some point, and I would assume it is this year, cease reinvestment; and see how the markets react. We can take our time to do this. We don’t have to be in a rush.” Mester disagreed: she did not rule out doing both a rate hike and a balance sheet announcement at the same meeting. Harker suggested September as a possible time for the balance sheet announcement but saw the timing as data-dependent. Bullard also cited September as a possible time for an announcement.
Financial stability concerns weighed on a few policymakers’ minds. Rosengren cautioned that persistently low interest rates could erode the ability of central banks to stave off future financial shocks, noting that one consequence would be greater use of “less traditional monetary policy tools.” Fischer, who gave a keynote speech at a macroprudential policy conference, recounted past episodes of housing bubbles and observed that high housing prices in several countries came “perhaps as a result of extended periods of low interest rates” but did not comment directly on rate or balance-sheet policies. Evans warned that using rate policy to counter asset bubbles would hinder progress toward the inflation objective.