The prospect of fiscal policy changes continued to be a key factor in policymakers’ thinking about monetary policy. The FOMC minutes revealed that less than half of participants incorporated assumptions of fiscal stimulus in their June economic projections. Bostic noted that: “We’re going to let the Congress do what the Congress is going to do, and we’re going to have the president sign what he wants to sign. And then once those things are done, we will make adjustments to our expectations about how the economy is going to evolve, and then that will shape our policy.” Fischer warned of adverse consequences from testing the limits of the U.S.’s creditworthiness during the debt ceiling debate: “I certainly hope we don’t get to the point” to where the full faith and credit of the U.S. is threatened. He also said that “mitigating the damping effect of uncertainty by providing more clarity on the future direction of government policy is highly desirable,” attributing reluctance by businesses to invest to “uncertainty about the policy environment.” He pointed specifically to “policies associated with health care, regulation, taxes, and trade.”
Yellen will testify before Congress tomorrow and Wednesday. The written Monetary Policy Report was published last week. It contained a comprehensive discussion of how the FOMC uses policy rules, contributing to the ongoing debate on the appropriate role of policy rules in monetary policy decisionmaking. The report found that “The small number of variables involved in policy rules makes them easy to use. However, the U.S. economy is highly complex, and these rules, by their very nature, do not capture that complexity.” The report concluded that “While policy rules can provide helpful guidance for policymakers, their interpretation requires careful judgment about the measurement of the inputs to these rules and the implications of the many considerations these rules do not take into account.” There was also a special focus on recent trends in productivity growth. On financial stability, the report noted that “Valuation pressures across a range of assets and several indicators of investor risk appetite have increased further since mid-February, but apparent high risk appetite in asset markets has not led to increased borrowing in the nonfinancial sector.”