In addition to Chair Yellen’s press conference on behalf of the FOMC (see Chair’s Press Briefing: Reiterating the Message in the Statement and Projections), several policymakers shared their views of recent inflation developments.
Chair Yellen argued in last week’s press conference that “this year, the shortfall of inflation from 2 percent, when none of [the headwinds applicable in 2014] is operative is more of a mystery, and I will not say that the Committee clearly understands what the causes are of that.” The factors that Chair Yellen cited were “slack in the labor market, which my judgment would be has largely disappeared, very large reductions in energy prices, and a large appreciation of the dollar that lowered import prices.” Williams appeared to disagree with her characterization of the FOMC’s view on inflation: “I push back against this mystery or other kind of arguments.” Instead, he noted that “it’s not surprising that inflation hasn’t picked up more,” adding that “I actually view the inflation data as overall consistent with what I would’ve expected in any given month or year.” He also saw the neutral rate as “likely to be around 2.5%,” which is even lower than the median longer-run rate projection of 2.75%. (See FOMC Statement Comment and Projections: Dots Point to December Hike.) Dudley expected inflation to return to its objective “with a firmer import price trend and the fading of effects from a number of temporary, idiosyncratic factors.” He also cited “greater incentives for businesses to invest in labor-saving technologies” as a result of the tightening labor market.
In contrast, Kaplan argued that some of the factors that are holding inflation back from its objective are not “transitory.” Rather, a “structural headwind is something you just have to think about and try to understand — I think it, in some ways, it’s at least partly offsetting some of the cyclical inflation.” As such, he saw a potential need to “recalibrate what we think the natural rate of unemployment is.” On the more hawkish end, George warned against making the policy mistake of leaving monetary policy to accommodative for too long, citing financial stability concerns and a higher risk of recession as a result (“moving too fast can cause financial conditions to tighten up and slow the economy”).