The possibility of pausing rate hikes once the funds rate reaches its estimated neutral level continued to be debated. The most prominent policymaker to comment on this topic was Governor Brainard (May 31). Her outlook warranted moving “gradually from modestly accommodative today to neutral–and, after some time, modestly beyond neutral.” She thought that an inflation overshoot that is “mild, temporary” would help lift underlying inflation back to target. She saw the short-run neutral rate as likely rising, but the longer-run neutral rate as holding steady. Quarles thought it was plausible that the neutral rate is rising (May 31). Williams, who will be New York Fed President later this month, also preferred gradual rate hikes over the next two years (Jun 1). His estimate of neutral was 2.5%, but as long as the economy remains strong and inflation is 2% or above, “that could mean that interest rates go above neutral for a period of time. I don’t view our policy path as just getting to neutral and saying, ‘okay we’re done.’” In general, policymakers appeared to be cautiously awaiting confirmation of the impact of recent fiscal changes. Geopolitical uncertainty, such as that relating to recent events in the euro area, remained a downside risk but did not seem to result in a downgrade in policymakers’ outlooks.
Policymakers also discussed the evolution of the FOMC’s forward guidance. Brainard thought that the current guidance that “‘the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run’ is growing stale and may no longer serve its original purpose.” Williams saw that wording as “no longer either accurate or…really that useful.” He thought that, as the funds rate continues to rise gradually, “less forward guidance” is needed. Rather, the FOMC could rely more on quantitative projections such as those in the SEP. His thoughts were consistent with Powell’s recent remarks.