The big news from the September FOMC meeting, in particular from the projections and press conference, was that there was a strong consensus on the Committee to hike in December. The dots revealed that most participants expected one more hike this year to be appropriate, and the median projection for core PCE inflation in 2017 and 2018 indicated that the consensus was that the underlying rate of inflation remained only somewhat below the objective. The minutes of the September meeting reinforced these points: “Many participants thought that another increase in the target range later this year was likely to be warranted if the medium-term outlook remained broadly unchanged.” Since the September meeting, there were no incoming data or comments from FOMC participants that would suggest any change in that consensus. FOMC participants expected inflation to rise to its objective over the medium term, though uncertainty remained about how quickly the recent softness would fade. There appeared to be solid momentum in economic activity and the labor market, however, which underpinned their belief that a gradual removal of accommodation remained appropriate.
Shortly after the September FOMC meeting, Chair Yellen gave a speech on “inflation uncertainty and monetary policy” (9/26). As we noted in our commentary, while the FOMC apparently sees the risks to the inflation outlook as balanced, Yellen’s comprehensive discussion of the inflation outlook suggested that she sees the risks to the baseline outlook as weighted to the downside. However, the questions she discussed are not ones that could be answered by the December meeting, and she made clear that she expected the recent slowdown in inflation to prove transitory and saw a gradual pace of rate hikes as appropriate. Toward the end of the intermeeting period, Yellen reiterated that view, saying, “My best guess is that these soft readings will not persist, and with the ongoing strengthening of labor markets, I expect inflation to move higher next year” (10/15). She did add that, though she saw temporary factors as suppressing inflation recently, she “would not claim that’s all of it.”
Many FOMC participants, including Yellen, have discussed the possibility that structural forces were suppressing inflation. Yellen noted that “The growing importance of online shopping, by increasing the competitiveness of the U.S. retail sector, may have reduced price margins and restrained the ability of firms to raise prices in response to rising demand” (9/26). Like Yellen, FOMC participants have generally pointed to this as something to consider, not as a core part of the inflation outlook, but President Kaplan is one exception. Kaplan appeared to share the consensus view that inflation would gradually rise to its objective, but he appeared more cautious than some of his colleagues: “I will be looking for evidence that building cyclical forces have the prospect of offsetting structural headwinds…It is likely we will see greater evidence of this progress [toward 2 percent] and, as a consequence, it will be appropriate to continue the process of gradually removing monetary accommodation” (10/10). He has noted that the evidence he requires to support a December hike doesn’t necessarily need to be an actual rise in inflation. In contrast, President Williams said that he didn’t “see any signs that somehow the inflation process is fundamentally changed” (10/17).
Williams (10/17) and Dudley (10/18) saw the FOMC as on track to raise rates once more this year. President Bostic said he was “feeling pretty comfortable about the idea that we will be looking to move rates come December” (9/26). He said that “The contacts we have on the ground are telling us that they are starting to
see far more pressure from a wage perspective and a pricing perspective,” a comment that likely places on the more optimistic end of the FOMC with respect to the inflation outlook. In contrast, President Harker identified himself as perhaps one of those described in the minutes as needing the incoming data to provide further support for a December hike: “We have to see how inflation dynamics roll out over the next couple of months and we have to make sure that the process of ceasing reinvestment is, as we anticipate, not very disruptive to the market…No need to firmly commit [to a December hike]” (10/17). He had previously said he’d “penciled in” a December hike (10/5). Williams (10/17) said that the median projection of three hikes next year “is a pretty good starting point,” and Harker (10/17) likewise indicated he projected three hikes next year. Kaplan said his projected pace of hikes in 2018 was slightly shallower than the FOMC median (10/6).
Representing the more hawkish side of the current FOMC, President Rosengren called for “prudent risk management” (10/7). He argued, in contrast to the FOMC consensus, that the FOMC should continue to raise rates to limit the risk of inflation rising too much, given the current state of the labor market: “failing to respond to very tight labor markets with rates remaining negative in real terms could potentially risk unnecessarily shortening the economic recovery…Rising inflation or an episode of financial instability eventually causes monetary policymakers to have to act more forcefully.” President George likewise indicated her continued support for further rate hikes.
Brainard, Evans, Bullard, and Kashkari seemed to identify themselves as the four FOMC participants who at the September FOMC meeting saw no further hikes this year as likely to be appropriate. Evans continued to advocate patience and express a greater willingness relative to most of his colleagues to allow inflation to overshoot its objective: “We’d be well served in trying to get inflation up, even if that meant inflation went to 2¼ or even 2½ percent—I think that’s what a symmetric inflation objective means…I really don’t see any harm in waiting longer just to take more stock of the inflation situation” (10/11). Likewise, Governor Brainard continued to identify herself as on the dovish side of the center of the FOMC. She acknowledged that temporary factors “seem to be an important explanation” for the recent slowdown in inflation, but noted that, “just as this year we saw temporary factors driving inflation down a bit, we saw temporary factors last year driving them up a bit. So that too cannot fully account for what we’ve been observing in the inflation data” (10/12). She continued to emphasize that “There does seem to be a very important, persistent, underlying trend in inflation, and there, a lot of the time-series work would suggest that we have actually seen a reduction in the underlying trend rate of inflation that’s material.” President Kashkari (10/2) wanted to see 12-month core PCE inflation hit 2% before the FOMC raised rates further (with exceptions). President Bullard likewise continued to oppose further rate hikes because of the soft inflation outlook.
While FOMC participants saw the economy as essentially at full employment, they generally indicated a willingness to allow further labor market tightening, given the weakness in inflation as well as uncertainty about labor market dynamics. Williams said: “A couple more years of roughly 4 percent unemployment and we’re going to learn a lot more about this labor force participation issue and really test this out to see if there are more people who can come back into this labor market” (10/17). President Evans thought an even lower unemployment rate might be appropriate, saying “It might take something like 3.5 percent” (10/11). President Dudley said that the persistence of below-objective inflation “suggests that more fundamental structural changes may also be playing a role…it would imply that the U.S. economy could operate at a higher level of labor resource utilization without generating a troublesome large rise in inflation” (10/6). President Harker said: “Since growth is fundamentally growth in productivity plus growth in the labor force, there’s a real incentive for us to get every last person off the sidelines that we possibly can” (10/17).
The lack of a substantial acceleration in wages was a key reason that FOMC participants were willing to accommodate further labor market tightening. Evans said, “We’re pretty close to full employment but stronger wage growth would reinforce that idea better” (10/11). Yellen noted that “wage indicators have been mixed, and the most recent news, on average hourly earnings through September, was encouraging. On balance, wage gains appear moderate, and the pace seems broadly consistent with a tightening labor market once we account for the disappointing productivity growth in recent years” (10/15).