Remarks from a number of policymakers confirmed our inferences from the December dots (see our Naming the December Dots: Pace of 2018 Hikes). Bostic, Bullard, Harker, and Evans appeared to see fewer than three hikes as warranted in 2018; Dudley and Kaplan shared the median view of three hikes; and Rosengren saw more than three hikes as appropriate. Debate also continued on the merits of alternative policy frameworks (see New Monetary Policy Strategies in a Low r-star World).
Those on the dovish side cited inflation as a key factor, although their motivations differed: Bostic’s base case was two to three hikes and pointed to downside risk to inflation expectations (Jan 8). He would be unwilling to support a faster pace unless “the inflation numbers start to move more in line with my expectations.” Bullard also expressed a dovish view and cited yield curve concerns (Jan 10). Evans didn’t see inflation reaching 2% until late 2019 or early 2020. His rate-hike view was motivated by a need to “put off the increases until about the middle of this year just to make sure the inflationary concerns resolve themselves” and he wished to confirm that the transitory factors have ceased before regaining confidence about further hikes (Jan 10). In contrast, Harker’s two-hike view was motivated more by the uncertainty of his inflation outlook, which was relatively optimistic: “continue to run just under our mark this year, rise a bit above target in 2019, and then come back down to our 2 percent goal [in 2020]” (Jan 12).
Dudley and Kaplan explicitly saw the median view of three hikes in 2018 as their base cases. However, Dudley sounded a bit more hawkish than three hikes (Jan 11). He warned that overheating was a tangible risk through the forecast horizon. Easier financial conditions today suggest the need to “press harder on the brakes at some point over the next few years. If that happens, the risk of a hard landing will increase.” Kaplan also mentioned overheating risk and cautioned that “We’re going to have to watch, because we want to avoid a situation where we have such an overheating that we’re playing catch-up,” which could precipitate an inverted yield curve (Jan 10). To him, “the cyclical pressures are building substantially, and they will offset some of the structural headwinds–we will have to see.”
Rosengren, as we predicted, wants to see more than three hikes this year (Jan 12). Compared with Dudley and Kaplan, Rosengren’s worries about overheating risk were pronounced: “My concern would be, particularly with fairly ebullient financial markets, that if we start having to tighten quickly, the risks of making a mistake go way up.”