In public remarks since the March FOMC meeting, FOMC participants indicated that they see three or four rate hikes as likely to be appropriate this year. With only a couple exceptions, they defended the FOMC’s decision to raise rates at the March meeting, and their remarks were consistent with an FOMC that seeks to carry out a policy with a “steadier hand” than previously, more focused on the medium-term outlook and less likely to interrupt the gradual pace of funds rate normalization when there are adverse developments that don’t meaningfully alter that outlook. There was little talk about the possibility of hikes at specific meetings in the near term since the FOMC hiked in March and there is no consideration of hiking again in May. An area that did receive considerable attention was the balance sheet policy. There appeared to be a strong consensus for announcing a change in reinvestment policy this year, though there did not seem to be much consensus on how normalization would proceed. Participants looked through the weakness in economic activity in the first quarter and saw the outlook for growth, the labor market, and inflation as essentially intact.
The FOMC’s decision to raise rates at the March FOMC marked a new mindset for the Committee. Previously, the prevailing consensus on FOMC had been that patience was warranted, given uncertainty about the economic outlook and the presence of important downside risks. Now, centrists on the FOMC, in defending the FOMC’s gradual pace of rate hikes, are making arguments that the more hawkish FOMC participants had been making for some time. For example, President Dudley, referring to the March hike, said, “By taking out a little bit of that accommodation—moving up interest rates just a little bit—we think it’s more likely we’ll achieve a soft landing, and keep the economy about where it is today in terms of employment and inflation” (3/24). Policymakers generally stressed that the FOMC was embarking on a very gradual pace of rate hikes and was by no means trying to cool down an overheating economy. Chair Yellen returned to the gas pedal analogy: “whereas before, we had to press down on the gas peddle trying to give the economy all of the oomph that we possibly could, [we are now going to] give it some gas but not so much that we’re pushing down hard on the accelerator” (4/10).
Presidents Bullard and Kashkari have identified themselves as the new dovish opposition to the FOMC’s center. President Kashkari (3/20), who dissented at the March FOMC meeting, explained his opposition to raising rates at this point: “We have a lot of room here to let inflation climb back to target, allow the job market to continue healing, allow wages to start creeping up. We’re just a long way away from having anything to be concerned about…So my question is, why are we raising rates until the data tells us it’s really time?” President Bullard had different reasoning for opposing funds rate hikes (3/24). Rather than seeing more room with respect to the inflation and labor market, like Kashkari, he disagreed with the view of his colleagues on the FOMC, which he said was that “you really have to get out in front with a faster pace of rate increases in order to keep inflation and unemployment where they are.” He thought the FOMC could take “much more of a wait-and-see posture,” the sort of language that had previously been employed frequently by members of the dove-center coalition within the FOMC. He saw the pace of rate hikes suggested by the dots as “potentially overkill.”
President Dudley (3/31) said “a couple more hikes this year seems reasonable,” and most of his colleagues agreed that three hikes total in 2017, the median projected number of rate hikes, was a reasonable baseline.
Notably, Vice Chair Fischer, speaking just before the blackout period started, reaffirmed his projection that two more hikes will be appropriate this year, saying, “so far, I haven’t seen anything to change that” (4/21). President Mester suggested she projected four rate hikes in 2017 (3/22). President Evans suggested that he is close to the center of the Committee, but still on the dovish side: “As I gain more confidence in the outlook I could support three total this year. If inflation began to pick up, that would certainly solidify [his support for three hikes]. It could be three, it could be two, it could be four if things really pick up” (3/20). President Williams (3/29) described his view as “similar to most of my FOMC colleagues,” but he suggested that he may see himself on the more hawkish side of center: “I should note, however, that given my forecast, along with upside risks, I would not rule out more than three increases total for this year.”
As suggested by the March FOMC minutes, many FOMC participants thought that FOMC might be ready to change its reinvestment policy later this year, though there did not seem to be a consensus on the specifics of how or when the policy might be changed. President Williams said, “it will be closer towards the end of this year to be ready to start that process of normalization of the balance sheet” (3/23). President Mester said that she would be “comfortable changing our reinvestment policy this year,” if economic conditions evolved as she expected (3/21). President Dudley said, “It wouldn’t surprise me if sometime later this year or sometime in 2018, should the economy perform in line with our expectations, that we’ll start to gradually let securities mature rather than reinvesting them” (3/31). President Harker said that reinvestment could be halted “possibly by the end of this year or the beginning of next year.” President Williams (3/29) suggested that the normalization of the balance sheet could begin before the FOMC reaches a decision on the balance sheet’s ultimate configuration: “We could start a normalization of the balance sheet and then make a decision, do we stop at X or Y.” Governor Powell wanted to see that the economy has “significant momentum” before changing the reinvestment policy (3/28). President Bullard thought the balance sheet should be normalized as early as would be practical, given his outlier view that the funds rate, inflation, and labor market are already essentially normalized. President Rosengren (4/19) had similar reasoning for wanting to start shrinking the balance sheet now: “We’re basically at our unemployment mandate and we’re basically at our inflation mandate. So ideally we don’t have to manipulate the yield curve…And since I think that a roll-off is necessary, starting sooner allows me to be quite gradual.”
There was general agreement that, once balance sheet normalization begins, that process should be “running in the background” and implemented so that it is “not a big deal for markets” (Dudley, 3/31). President Dudley suggested that phasing out reinvestments gradually might make implementation smoother (3/31). President Harker likewise said, referring to ending reinvestment, “I don’t necessarily see some abrupt cut off and then we’re done” (4/3). President Dudley noted that starting to normalize the balance sheet is “a substitute for short-term rate hikes,” and caused a bit of a furor by saying, “we might actually decide at the same time to take a little pause in terms of raising short-term interest rates” (3/31). He later tried to temper those remarks, saying they’d been “misconstrued” (4/7). He clarified that pausing rate hikes when announcing a change in reinvestment policy would be to ensure that the move “doesn’t turn out to be a bigger decision than you thought you were making. So, I would emphasize the words ‘little pause.’” While many of President Dudley’s colleagues also noted that changing the reinvestment policy would result in a change in monetary accommodation and therefore affect their views on the appropriate path of the fund’s rate, President Kaplan (4/12) flatly dismissed that reasoning: “I’m not going to get into the pause, no pause. I think it’s more appropriate to talk about the path of rates…The objective and the initiative to let the balance sheet runoff does not alter my views as to what the path of rates should be.” As for the treatment of MBS and Treasury securities, President Kaplan said both should be allowed to run off, but “we just have to tailor our plan to each of those types of securities” (3/23). In contrast, President Dudley (3/31) said, referring to allowing runoff in the Fed’s securities portfolio, “I don’t think there is a strong need to differentiate between mortgages and Treasuries.”