Policymakers are now nearly unanimous in supporting a December hike, but the pace in 2018 remains an open question.
Their comments suggested the center of the FOMC is still at three hikes in 2018, consistent with the September median projection. Williams concurred on that point, but has a lower estimate of the longer-run funds rate than the consensus. As such, he was worried about the lack of policy space between the longer-run rate and the effective lower bound: “I think this is going to be the big challenge for us going forward…if you’re starting from 2.5 or 3%, you obviously don’t have as much maneuvering room to give the economy a boost” (Nov 9). In another interview, he argued that the source of recently softer inflation wasn’t cyclical: “I think of these as supply shocks that are holding inflation down that really aren’t cyclical.” He appeared confident that the strong economy and labor market would provide a cyclical boost to inflation (Nov 6). Unlike many of his colleagues, his base case assumed fiscal stimulus. He projected a continuing decline in unemployment, to slightly below 4%, that would consequently buoy inflation in 2018 and 2019. With a soft landing, he expected monthly payroll growth to slow to 80-100K.
Like Williams, Harker projected a funds rate path for 2018 consistent with the FOMC median (Nov 8). He expected to support a December 2017 hike, but qualified this projection, adding, “perhaps I should say, ‘lightly penciled in’” (Nov 12). Inflation was “the one area that not only continues to elicit caution, it even constitutes a conundrum.” He also shared Williams’s concern about the lower neutral rate’s proximity to the effective lower bound: Though he was confident that inflation is under control, he wanted rate hikes “to give us the leg room, that is, having the fed funds rate high enough so that if and when the next recession comes, we’ll have some room to move.” He wanted the pace to be gradual enough to avoid an inverted yield curve, which he saw as potentially problematic. Harker’s forecast included no fiscal stimulus.
The more-dovish contingent continued to point to sluggish inflation and some evidence of persistent labor market slack. Bullard (Nov 10) alluded to a now-weaker Phillips curve dynamic, meaning that low unemployment might not necessarily lead to too-high inflation. He also pointed to the low participation rate as suggesting slack may remain. Bullard appeared to accept a December hike despite his worries about inflation expectations: “I’ve said that I’m willing to go with the data, and growth prospects have been better this fall.” Another bright spot he cited was the new Administration’s deregulatory agenda boosting business confidence.
Chairman-nominee Powell’s confirmation hearing has been set for November 28. We will be watching with keen interest and will offer our interpretation expeditiously.