FOMC participants continued to share divergent views on the prospects of a third rate hike this year. Fischer described the division of views on how to respond to recent inflation readings: “There will be arguments on both sides on this thing. I’m not sure where that discussion is going to end up. This continuation of lower than expected inflation rates is something we have to think about.” Dudley’s remarks were consistent with the most recent Committee communications: “We’re still on the same trajectory we’ve been on for several years. Above-trend growth, gradually tightening labor market, inflation—somewhat below our objective—but we do expect as the labor market continues to tighten, to see firmer wage gains and that will ultimately filter into inflation moving up towards our 2% objective.” He would back a third rate hike “if [the economic forecast] evolves in line” with his expectations. Williams noted that “We do need to see some more rate increases over the next couple years to get us to this normal level…We’re probably about half the way there in terms of raising short-term interest rates.” Kaplan struck a cautious tone, noting that “we’re accommodative, but we may well not be as accommodative as people think.” He thought the Fed should be “very patient and judicious” when considering the next rate hike. Nonetheless, he still thought that inflation would reach the two percent objective “in the medium term.” Bostic noted that recent developments in the labor market and consumer spending have “not translated into the sustained level of inflation that all of our economic models say should exist…So if we don’t see that kind of inflation, my view is that we should try to be somewhat more hesitant in moving stridently in any direction. Let’s wait and see.” On the other hand, Mester reiterated her view that the Fed should not wait too long before continuing to tighten policy: “We have to be cognizant of the fact that the Fed has to move before we get to both of our goals…I’m not one who would like to see inflation be at 2 percent before we continue on the path.” She was not yet convinced that the recent weakness in inflation was enough to delay the third rate hike: “I still think we need to start bringing back some of the accommodation.”
The debt ceiling debate affected policymakers’ views in different ways. Fischer noted that “in some deep sense people don’t believe the Congress and the administration will allow the United States [to] default on its debt.” Fischer added that any market volatility would likely be short-lived: “There is also a desire to say that we have some confidence that the system is pretty damn stable.” Kashkari said it would be a factor in deliberations on the timing of the balance sheet reinvestment announcement. Mester did not see any political uncertainty in general as feeding through to the growth outlook yet. Williams thought that “fiscal policy isn’t going to fundamentally shift the direction of the U.S. economy over the next couple of years.”