FOMC participants saw the economy as close to meeting the dual mandate objectives. With moderate growth likely ahead, they saw a need to raise rates in 2017. Moreover, with the economy close to full employment and price stability, they suggested they would respond to fiscal stimulus by tightening monetarypolicy more, to keep the labor market from becoming too hot.
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Yellen noted that inflation has picked up and is close to its 2 percent objective. Bullard’s view was that it “does not appear that undue inflationary pressure is building.”
Bullard’s forecast was “more of the same in terms of growth rates around 2%, inflation around 2%.” Evans thought that “the recovery has been well under way, it is extremely mature and the labor market has improved.” He expected “real GDP to increase modestly over the next couple of years,” and added that theeffect of fiscal policy on growth could be on the order of “a couple tenths” and as a consequence “we would need less accommodation, or the current low level of funds rate would be more accommodative.” Harker saw progress on both the employment and inflation fronts, arguing that we are “doing very well” on the labor market and the labor market “more or less at full health,” while inflation would hit 2 percent “sometime this year or next.” Rosengren held an optimistic view: “The current unemployment rate is at my estimate of what is likely to be sustainable in the long run, and total and core PCE inflation measures are approaching theFederal Reserve’s 2 percent inflation target.” Dudley argued that “while economic shocks are, by their very nature, difficult to forecast, the risk that the Fed will snuff out the expansion anytime soon seems quite low because inflation is simply not a problem.” However, in response to a moderator’s question he answered: “If we pushed the unemployment rate much lower, we’d have an inflation problem.” Brainard, whom we see as the most dovish of the governors, argued the “given the recent improvement in unemployment and inflation and the possibility of increased fiscal stimulus, risks in the domestic economy are closer to being balanced than they have been for some time.”
Lockhart called the recovery “satisfactory,” stopping short of calling it normal: “I feel some need to resist calling this recovery a return to normal.” He was concerned about downbeat expectations affecting growth: “You always worry about shocks, things that come out of the blue that affect the economy. And then I think you probably have to be concerned that the toxic political environment continues.” He added that there might be “a change of mindset for many of you in the economy that gets more pessimistic. Expectations do influence actual outcomes.” He was also skeptical of the need for fiscal stimulus at this point: “fiscal stimulus when you have a large output gap is one thing…Fiscal stimulus when you are at full employment is another.” Williams was similarly skeptical about the need for short-term fiscal stimulus. Dudley was worried about theimpact of a border adjustment tax, noting that the proposal “is a pretty dramatic change” and “would lead to dramatic changes in the value of the dollar.” He preferred a proposal “that’s probably a little bit less dramatic”
Kaplan reiterated that the median view of three 2017 hikes is “a pretty good approximation of [his] views at this time.” Likewise, Evans characterized the median view as “plausible.” Harker’s projection of three hikes does not include fiscal policy: “There’s policies that could cut both ways: when there’s a fiscal stimulus, that of course we’d have to factor into account with respect to inflation and inflation expectations. But if there aretrade barriers put up, that can also have a negative effect.” Lockhart saw “a path of gradual increases. Defining gradual will depend on how the economy evolves.” He added that “more robust” growth could quicken the pace “a little bit.” However, he also revealed that “my position was two in 2017…I am on the more cautious side of the two versus three.” On the other hand, Rosengren saw more upside risk: “Without further gradual increases in interest rates, one might be concerned that the unemployment rate could drift below its long-run sustainable level—and as a result, inflation could eventually exceed the Fed’s 2 percent target.” He warned, “monetary policy will need to adjust—to prevent the economy from dramatically overshooting on both elements of the dual mandate, which would place the economic recovery at risk.” Brainard also alluded to the possibility of a faster pace: “If fiscal policy changes lead to a more rapid elimination of slack, policyadjustment would, all else being equal, likely be more rapid than otherwise, with the conditions the FOMC has set for a cessation of reinvestments of principal payments on existing securities holdings being met sooner than they otherwise would have been.”
On the issue of Fed balance sheet reinvestments, Kaplan said, “we should be debating probably in 2017 how we might begin to let the balance sheet begin to run off,” adding that it would be “wise to do this in phases.” Rosengren shared this view, arguing that “Over the course of this next year, it’s going to be very appropriate to examine whether we want that balance sheet to start moving down,” adding that the process would be “gradual.” Bullard argued that letting the balance sheet runoff could be a better means of normalization than rapid rate hikes: “Adjustments to balance sheet policy might be viewed as a way to normalize Fed policywithout putting exclusive emphasis on a higher rate path.” Harker saw a funds rate at 1 percent as a threshold to consider stopping reinvestment.