A number of policymakers continued to prefer a rate hike in December. The key argument among those supporting a hike was the need to preempt the risk of overheating and a subsequent need for more-rapid tightening. For instance, Rosengren called for “prudent risk management” and warned, “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 policy makers to have to act more forcefully.” George cited similar arguments. Williams acknowledged the inflation shortfall, but said he did not have to see actual inflation improve before the next rate hike as long as the overall economic outlook was supportive of an inflation improvement. Williams called the median projection of one more 2017 hike and three 2018 hikes as “still very gradual.” However, he saw 2.5% as the neutral rate, implying one fewer rate hike before reaching neutral relative to the FOMC’s median projection: “A variety of factors have pushed r-star to this low level, and they appear poised to stay that way.” Powell acknowledged that he was worried about persistently low productivity growth.
Dudley’s remarks appeared to reflect the FOMC’s puzzlement over the inflation shortfall: “its persistence 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.” Harker appeared to be warning against extrapolating too much from labor market strength: “We’re in a tight labor market right now, but we aren’t creating quality jobs within that market; we won’t see as big an economic impact.” He also saw balance sheet tightening as being equivalent to one hike over the next four to five years. Nonetheless, Harker “penciled in” a December hike.
Some of those who cautioned against a December hike pointed to the recent inflation shortfall as a warning sign. Bullard lamented that “It looks like we’re going to get to the December meeting, and we’ll basically be saying that we’ve made no progress on [the inflation front.]” Kashkari wanted to impose a condition of actual 12-month core PCE inflation hitting 2% before the next rate hike. In contrast, Kaplan appeared to be genuinely undecided on a December hike: “I would like to see more evidence of progress in reaching our inflation target. I have the benefit of time and I plan to take it.” However, Kaplan revealed that his projection for the rate path in 2018 is slightly shallower than the FOMC median’s three hikes. Like Williams, Kaplan did not “need to necessarily see higher inflation before the meeting” but still had to “see evidence that the cyclical forces are picking up enough that eventually it’s likely that inflation will build in the future.”
Following the September employment report data, a number of policymakers expressed their views of a December hike. The most pessimistic was Bullard, who noted, “To actually have negative numbers there was a bit startling…I thought the jobs report was clearly weaker than expected, it does cause me some concern…I thought the market reaction was a little bit too nonchalant about this number.” Kaplan remarked that he was open-minded about a December hike but “not there yet,” adding that the FOMC “ought to be patient.” Bostic was in wait-and-see mode despite noting that wages showed “strong growth.” Dudley’s prepared remarks indicated that he continued to support gradual rate hikes, as did Rosengren’s.