The minutes of the December 2016 FOMC meeting were published on Wednesday [link to commentary]. The most important message in the minutes was that, while there was uncertainty about the timing, size, and composition of the fiscal stimulus to come, there was not such uncertainty about the monetary policy response: raise rates more than otherwise to meet the dual mandate. About half of FOMC participants assumed fiscal stimulus, and the median pace of projected hikes increased. As for the economic data, they were strong, the highlight being yet another solid employment report [link to commentary].
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Evans’ base case is two hikes, but he noted that three hikes is also possible. He stressed that theexpected pace is contingent on the data: “I still think two moves is not an unreasonable expectation for [2017], but it’s going to depend on how the data roll out…If it’s a little bit stronger, three is not going to be implausible.” Williams again emphasized the data-dependent nature of future rate hikes, although he characterized the median projection of three hikes as a “very reasonable” view. Harker was “penciled in for three rate increases.” Kaplan, too, noted that the median “gives you a sense of my views.” Mester’s base case was three hikes; she saw the median projection of three 2017 hikes as “reasonable,” noting that “the median path is a good summary of where the tenor of the committee is.” Lacker suggested that rates “may need to increase more briskly than markets appear to expect.”
On the timing of 2017 rate hikes, while market prices imply that the next hike will occur in June, Evans again stressed data dependency, noting, “Whether it starts in March or it starts in mid year it’s going to depend on how the data are, what expectations look like.” In contrast, Rosengren pointed out that “it’s a little bit too early” for the next rate hike because fiscal policy is uncertain, although he, too, saw a “somewhat more regular” pace of rate hikes as justified. Williams shared this view. Powell emphasized that there is “tremendous uncertainty” in the economic environment, warranting less focus on the median dots projections.
As for potential fiscal stimulus, Kaplan noted that infrastructure spending “may well help with productivity growth,” but he said he “won’t prejudge the impact of future fiscal policy.” Evans expressed a similar sentiment, pointing out that “we’re going to have to wait and see what the details are on that in order to properly assess that.” Nonetheless, he revealed that the expectations of fiscal stimulus had a “very modest” effect on the Chicago Fed’s forecast: “We added a little bit of expected fiscal stimulus [to our forecast] just because we thought it was a more positive development as opposed to just a more contractionary financial development.” Williams argued that short-term fiscal stimulus is not necessary at this juncture, pointing out that short-term stimulus would have been more useful three or four years ago to speed the return to full employment. Rather, “what we need is really better policies and investments in the long-term health of the economy.”