In her testimony, Yellen continued to argue that “it’s premature to conclude that the underlying inflation trend is falling well short of 2 percent. I haven’t reached such a conclusion” (7/13). She saw inflation risk as being “two-sided,” citing not only the recently low inflation numbers but also a labor market that is quite tight and continuing to strengthen: “experience suggests that ultimately, although with a lag — we’re not seeing very substantial upward pressure on wages, but we may begin to see pressures on wages and prices as slack in the economy diminishes. So I see the risk with respect to inflation as being two-sided” (7/13).
The central question for policymakers in considering the next rate hike was clearly the inflation outlook. Brainard said: “In terms of my own thinking and where I am currently, I am most focused on getting inflation back up around our 2 percent target” (7/13). She also noted that “The Phillips curve just seems to be very flat.” She observed that r-star staying low in the medium room meant there is “less room to buffer shocks” with rate policy. Harker was also cautious on the inflation outlook, noting that he was in “wait-and-see” mode on whether low inflation was merely transitory. He said that inflation failing to move toward the objective would give him a “little pause in terms of the policy path” (7/11).
Commenting after the CPI release on Friday, Kaplan said, “I would now at this point like to see more evidence that we’re making progress in meeting our inflation objective before we take further steps in removing accommodation. I’ve been counseling patience” (7/14). Linking the CPI data to the PCE measure that the FOMC prefers, he noted that “The Fed’s target is based more on PCE than CPI, but with that proviso, I think you’ll find the March number was particularly weak, the April and May numbers were somewhat better” (7/14). He alluded to the Phillips curve as the basis for his forecast: “As we remove slack from the labor market, you’re going to see…with a time lag, likely see more wage pressure, and some of that will likely translate into greater inflation pressure. That’s my theory” (7/13). He observed that you would have “historically seen more inflation pressures” associated with the current low level of unemployment and “a relatively low amount of labor slack.”
Evans argued that “slow” removal of accommodation is “necessary” to achieve the inflation objective. He stressed the symmetry of the inflation target as well: “We also have to assure the public that…we are not overly conservative central bankers who view our inflation target as a ceiling” (7/14). Commenting earlier in the week before the CPI release, Brainard noted that for earlier low inflation data, “it is true that the miss was large, but there were also some very specific factors associated with that miss, which made it I think important to monitor a bit longer to see how much of that is in fact idiosyncratic and how much of that is something that should be taken into account” (7/13). Kashkari wanted to see wage increases to convince him that inflation would also rise (7/11).
Policymakers continued to reaffirm our expectation that the FOMC would likely announce the beginning of balance sheet in September. Yellen said runoff should begin “relatively soon.” Kaplan noted: “As early as September it might be appropriate to begin the process of allowing the balance sheet to run down.” Brainard noted that the ultimate normalized size of the balance sheet would remain unknown for “some time” and added that “the framework that we’re currently operating under works very well and that I would anticipate remaining in the current framework” (7/13). Yellen expressed a similar view: “We’ve not decided yet on what our longer-run monetary policy framework will be, and what quantity of reserves.”
Policymakers also touched upon the potential issue of asset bubbles and broader financial stability concerns. Brainard noted that asset pricing is not “way out of line, but elevated I would say, relative to historical averages” (7/13). In her testimony, Yellen mentioned that on the subject of “potential spillovers or impacts on financial stability could be of asset price revaluations…as asset prices have moved up, we have not seen a substantial increase in borrowing based on those asset price movements” (7/12).