Policymakers continued to disagree on how the FOMC should react to incoming inflation data.
A few policymakers pointed to technological change as a structural factor exerting downward pressure on inflation. Kaplan argued that technology has limited the pricing power of businesses. Bullard noted that “Technology prices have been dropping for a long long time. The technology share of every single good is getting bigger. Those prices are tending to drop.” Bullard and Kashkari were particularly worried that persistently undershooting the inflation objective would harm the Fed’s credibility.
Evans characterized the recent blips in the inflation data as “sufficiently unusual” and “expected to be one-off, temporary, and recede.” He noted that “there is probably still some room for the labor market to run, because [businesses] haven’t had to increase wages as much…you would expect people to have to have to fight for their workers in all of that, but it hasn’t shown up yet.” Evans also questioned how strongly the Phillips curve relationship currently holds: “If [technological disruption] goes away so that we get back to the environment where inflation is running more in line with the setting of monetary policy…then I think a lot of this would come down to…is the unemployment rate undershooting dramatically, is the Phillips curve playing a strong role?” Nonetheless, he noted that the expectation that “we’re on track for inflation to increase to our 2 percent objective over the next few years” is “reasonable.” In contrast, George stated that “Inflation moves quickly..I don’t think you need to wait to see the whites of its eyes.”
Dudley pointed to weak productivity growth as interfering with a recovery in wage growth: “Wage growth has also been comparatively modest even as unemployment has declined. In part, this likely reflects the fact that productivity growth has been sluggish compared to historical experience.” He warned against reading too much into the low 12-month inflation figures, a point that we have made: “I do think I expect inflation to start to move higher in the medium term but probably not get back to 2% on a year-over-year basis…We’ve had these very weak inflation reads for a number of months in a row so we’re not going to get to a year-over-year number of 2% until some of these very low readings drop out of the statistics, six to 10 months from now.” He warned: “It’s really important to distinguish what’s happening sequentially” as opposed to the 12-month basis.
Following the release of July CPI, Kaplan said “I wouldn’t say I’m concerned” about the reading. He counseled patience: “I’d say more I think it’s worth being patient to try to better understand. That’s my approach to this…So while the Fed’s accommodative, we’re less accommodative than we were. And I think it causes me just to want to make sure, before we take a next step, that I understand upcoming data to see if we’re making progress.”