There appeared to be broad support among policymakers for three hikes next year, in line with the FOMC’s median projection. Mester noted that the neutral rate is rising but will still end up lower than it once was (Nov 16). In her speech, she referred to structural demographic shifts as weighing on labor force growth and therefore potential growth. She also saw lower quit rates as well as aging populations contributing to a lower NAIRU. Kaplan held a similar view: The “destination where we get to neutral is away but it’s not that far away” (Nov 16). He noted, “we have a pretty healthy household sector and we know the labor force is getting tighter,” which encouraged him, “unless you see that deteriorate, we’re growing at levels that are sluggish by [historical] standards — but my expectation is we’re going to keep growing.” Rosengren warned that failure to maintain a steady pace of rate hikes could induce a policy mistake and lead to a recession (Nov 15). He contrasted the uncertainty over inflation softness with his view that the undershooting of unemployment is expected to last. Williams reiterated his expectation that the nominal neutral funds rate is 2.5% (lower than the FOMC median of 2.75%), which for him meant that a “gradual” pace was appropriate because the funds rate did not have to rise “that far” (Nov 16). Nonetheless, the funds rate pace he cited was the September FOMC median (one more hike this year, three next year). He noted, “what we’re looking at is actually a ‘new normal,’ characterized by trend growth and interest rates much lower than we’re used to…If interest rates are only around 2 to 3 percent when the next recession hits, conventional monetary policy will have lost much of its punch.” While Mester cited signs of impending wage growth and indications of productivity growth improvement, Bostic saw only “modest” increases in wage growth and referred to muted expectations of labor cost pressures (Nov 14).
An exception to the broad support for rate hikes was Evans (Nov 15). He saw a threat to the Fed’s credibility. He repeated his willingness to see inflation go above 2 percent and said “we could go below 4 percent” unemployment: “With each low monthly reading, it gets harder and harder for me to feel comfortable with the idea that the step-down last spring was simply transitory.” He elaborated, “something more persistent is holding down inflation today…namely, I feel we are facing below-target inflation expectations.” However, even he acknowledged that the labor market was “vibrant” and looked for signs of inflation expectations increasing. Bullard was another exception, warning of falling inflation expectations and further flattening of the yield curve (Nov 14). Bostic pointed out that “we are seeing a demand for U.S. securities actually go up in ways that are going to flatten the yield curve significantly” (Nov 14). He warned that “that is different from making a read on broader economic performance.” Harker’s base case for 2018 continued to be three hikes but he said his confidence would be greater if inflation surpasses 2 percent (Nov 12).
As for the broader discussion of policy tools, Williams cited the need for negative rates as a potential lever during a recession, although he argued that asset purchases were more effective. On the current debate about a price-level targeting strategy, Williams thought the FOMC should not “act like we have a price-level targeting strategy” unless it is the FOMC’s officially chosen strategy (Nov 16). But he did support following the Bank of Canada’s example of reviewing the inflation target at regular intervals. Yellen, speaking on a panel, reminded that central banks are “loathe” to providing exact forward guidance (Nov 14).
Recent advances in tax reform legislation brought this topic to the forefront of the monetary policy debate. Kaplan argued that fiscal stimulus should be considered in the current context of a solid domestic labor market: “The U.S. economy is approaching full employment” (Nov 17). He also cautioned that “we have to be careful not to increase debt-to-GDP,” which he saw as “historically high.” Bullard was optimistic on tax reform: “When productivity goes up, wages go up and everyone is happier. That is part of the aim of the tax bill” (Nov 14). However, he has yet to incorporate fiscal stimulus in his own forecasts.