Last week, the doves had the floor to themselves, for a change, and Brainard, Kashkari, and a new dove, Lockhart, spoke just before the pre-meeting blackout took effect on Tuesday and before the weaker-than-anticipated data on retail sales were released.
Brainard gave a forceful presentation of the dovish argument for continued accommodation, focusing on the need to see more data convincing her that inflation is on an upward trend that will take it toward 2% over the medium term. This sentiment is summed up by the passage: “The apparent flatness of the Phillips curve together with evidence that inflation expectations may have softened on the downside and the persistent undershooting of inflation relative to our target should be important considerations in our policy deliberations. In particular, to the extent that the effect on inflation of further gradual tightening in labor market conditions is likely to be moderate and gradual, the case to tighten policy preemptively is less compelling.” [Link to commentary.] On one hand, “Phillips curve flattening, the possibility of remaining labor market slack, the likely substantial response of the exchange rate and its depressing effect on inflation, the low neutral rate, and the fact that inflation expectations are well anchored to the upside” limit the risk of too-high inflation, while on the other hand, “the risk of being unable to adequately respond to unexpected weakness is greater.” Thus, “this asymmetry in risk management in today’s new normal counsels prudence in the removal of policy accommodation.”
Kashkari also focused on inflation developments, noting that “inflation is still coming up a bit short,” although wages are starting to turn up: “My view is there doesn’t appear to be huge urgency to do anything, frankly, and let’s get as much data as we can and let’s try to get our inflation back up.”
Lockhart struck a more dovish tone than he had previously: “This measure of inflation has been very constant for four years now. It’s been consistently around 1.6 percent…By this measure, progress toward the Committee’s inflation objective appears to have stalled…the flat trend line is enough below target that, in my opinion, the shortfall cannot be considered immaterial.”