FOMC participants continued to discuss what the symmetric nature of the inflation objective means for policy. Bostic said, “Just because inflation goes a little above the 2 percent target doesn’t mean that we are going to panic or act in a dramatic way…This is not a declare a victory type of moment; it’s really, we are aware, we are alert and we are willing to be flexible as the data takes us places” (May 4). Williams shared a similar view (May 4). He argued that the additional “symmetric” in the May statement was “a signal to say that inflation will sometimes be above, sometimes below, but on average at 2 percent,” which has been our interpretation. Bostic said that he is “comfortable with some degree of overshooting the 2 percent target” (May 7).
Kaplan continued to argue that it would give him “great pause” if he thought a rate hike would invert the yield curve. In his view, the neutral rate is only 2.5% to 2.75%, so “Once we get in the mid-2’s, I think [hiking rates] gets a lot tougher” (May 4). Williams reiterated his argument that “a long-term rate of r-star of between zero and one percent is likely going to be with us for a long time.” He thought that the causes were structural as well as cyclical. He thought that the March projection of three to four hikes in 2018 remained valid. Bostic “firmly” saw three hikes this year, although he saw upside risk and said the economic outlook is “pretty rosy…There’s a lot of upside potential that’s out there.”
Dudley described the April payroll reading as a “healthy gain” and the outlook in generally as “pretty good” (May 4). While he thought investment was doing “reasonably well,” he downplayed the positive impetus of fiscal stimulus on investment: “I would expect that it will probably be more modest than really large.” Kaplan warned that large fiscal stimulus now would hinder the ability to use fiscal policy during the next recession. He has recently been on the more cautious side and thought that the data suggested “there’s more wage pressure out there” than the wage growth number suggested (May 4). He also saw the pricing environment for businesses as “more challenging than any time” in his career. Bostic thought wage pressures were “not widespread” (May 7). He was disappointed that the stronger jobs numbers have not translated into higher wage growth. Williams did not think that a rapid increase in inflation is imminent. But George thought that inflation rising above 2.3% might warrant a steeper path (May 4).
Quarles discussed link between the Liquidity Coverage Ratio and banks’ demand for reserve balances. He noted that the Fed has not made a final decision on the longer-term balance sheet framework (May 4). He said the Fed does not yet have a “definitive handle on banks’ long-run demand for reserve balances.” He argued that “a wide range of quantities of reserve balances — and thus overall sizes of the Fed’s balance sheet — could be consistent with either” a floor or corridor regime. He argued that the Fed “is not constrained by [bank liquidity] regulations in deciding its operational framework.” George argued for a resolution of the longer-term balance sheet framework as it would clarify the ultimate path of the balance sheet.