Debate continued on what the FOMC’s strategy should be once the funds rate has been brought closer to estimates of its neutral level. Harker thought the funds rate was “getting close” to neutral, which he saw as 2.75% to 3% (May 24). In his view, “Let’s get to neutral and see how things play out, I would prefer to not be contracting the economy” (May 21). Harker’s case base was three hikes in total this year. Kaplan (May 25) argued that “After three or four more moves, we’re going to be at neutral.” He added: “I’m not prepared yet to say I want to go above neutral. I think once we get there, we’ll have to make that judgment at that time, whether it makes sense to be restrictive.” He thought neutral was 2.5% to 2.75%. Mester saw the outlook as “rather positive,” and therefore further adjustments to policy were warranted. But she, too, warned against becoming “overly restrictive” (May 23). She suggested that the neutral rate was likely no higher than 3% (May 22).
Powell broached the topic of the appropriateness of the FOMC’s forward guidance, a subject that was discussed in the May FOMC minutes (May 25). He saw a “significantly smaller” role for forward guidance going forward. He also appeared to caution monetary policymakers against commenting excessively on fiscal policy: “central banks also need to stick closely to our mandates; the case for independence weakens to the extent that central banks stray into issues that the legislature has not assigned to us.” However, in contrast to others’ arguments about diminished ability of fiscal policy in a future downtown, he said: “It’s not literally the case that we would not have fiscal space to respond in the next few years.”
The possibility of a yield curve inversion continued to weigh on the same policymakers as in previous weeks. They explicitly linked this risk as a reason for advocating fewer rate hikes. Harker reiterated: “I don’t see why we would move in a way that would invert the yield curve just to do it” (May 21). Bostic thought that the issue was “very present” with all policymakers, but he also thought the FOMC could adjust rate policy in response to this threat (May 21). Kaplan said, “I’m going to be watching very carefully the shape of the yield curve. That’s the reason why I’m saying let’s just keep the base case for this year at three” (May 25). Kashkari continued to argue that inversion was the “single best predictor” of an upcoming recession (May 23). However, Mester pointed out that “Just because the yield curve is flat does not necessarily mean lower growth or even a recession; there are a number of good reasons why the yield curve is currently flat.”