Policymakers continued to diverge on the pace of rate hikes they saw as appropriate for this year. Williams (Feb. 23) thought “it makes sense to think about three to four” as he cited overheating risk. He saw the neutral rate as having risen as a result of fiscal policy decisions: “I still think we’re in the realm of a movement in r* that might be at most a quarter of a percentage point.” He expected the effect of tight labor markets on inflation to become apparent: “The Phillips curve relationship is still at play, it’s still there, it’s just that other developments have happened…[that have] obscured those effects.” Kaplan (Feb 22) saw three hikes as a “reasonable base case.” On the other hand, Harker said he still “penciled in two hikes for 2018″ (Feb. 21). Bullard, too, was concerned about the pace being too rapid: “if the Committee raises the policy rate substantially from here without other changes in the data, the policy setting could become restrictive” (Feb. 26). Kashkari (Feb. 21) argued that the past inflation undershoot suggests “we should be able to tolerate 2.5 percent for five years.”
Policymakers continued to discuss broader questions about the monetary policy framework. Dudley (Feb. 23) continued to express faith in the efficacy of balance-sheet policy, which he saw as “useful to have in the toolkit for those times when the short-term interest rate tool may not be available.” Ultimately, he saw the Fed balance sheet as reverting to “$2 trillion or $2 trillion-plus.” As for the Bank of Japan’s yield curve control policy, he noted “that is an interesting way of providing stimulus, and a maybe more efficient way of getting bang for the buck from the balance sheet, because you don’t have to buy that much stuff to be credible…But I think it’s too soon to make really strong conclusions because there is a question of exit, and we haven’t actually gotten to experience that. So, speaking for myself, I’d like to see how exit works before I jump to a strong conclusion about yield curve control.” Rosengren (Feb. 23) also saw a continued need to keep asset purchases in the toolkit, but warned that if they were not effective, it “might entail altering the monetary policy framework, in a way that would be more likely to avoid short-term rates hitting zero.”