Several policymakers continued to be wary of possible overheating risk. Kaplan argued that tax reform “makes it more likely that the headline unemployment rate is going to get into the 3s by the end of 2018…This legislation further adds to my conviction we should be moving gradually but deliberately in 2018” (Jan 17). He wanted to be “very vigilant” so as to avoid an inverted yield curve. One warning sign he referenced was the ten-year Treasury yield not rising enough in response to fed funds rate hikes. In contrast, Williams warned that QE has changed the implications of the slope of the yield curve (Jan 19). His base case remained three hikes this year. He saw “greater upside” risk to the outlook and said, “[fiscal stimulus and firmer data] provide me with greater confidence that the US economy is going to continue to grow actually somewhat above trend this year.” In particular, “inflationary pressures are clearly starting to build, helping us get back to 2 per cent.” He added that rate hikes would also help moderate financial stability risks. In a separate interview, he added that he thought there was a greater chance of four hikes than of two (Jan 21). Mester also saw upside risk from tax cuts; she estimated that the effect would be one quarter to one half of a percentage point to growth over the next two years (Jan 17). In her view, an appropriate pace was “three to four fed funds increases this year, three to four next year” (Jan 18). Dudley cited the median projected pace of three hikes, but added that with tax reform “the risk, not in 2018 but longer term, is that the economy could actually overheat, that inflation might not stop at 2%, or 2.1% or 2.2%, and then the Federal Reserve would have to step on the brakes a bit harder” (Jan 18). He also raised the question of whether r-star is higher than currently assumed.
Evans remained reliably dovish, saying, “we seem to be at a point where we’re not experiencing inflationary pressures” (Jan 17). He didn’t see the first rate hike of 2018 being appropriate until June at the earliest: “I kind of think that something less than three is probably appropriate, especially since I personally didn’t prefer the December rate increase, and so my own path didn’t have that in it, and so I would probably think about taking off one of my rate increases for 2018, until I know better that inflation is really picking up.”
Dudley gave his thoughts on the current debate on policy frameworks (Jan 18). He did not seem open to raising the inflation objective, but appeared sympathetic to considering other modifications to the FOMC’s inflation-targeting framework. He cited price-level targeting as worthy of consideration, despite its complications, and mentioned a couple other less-extreme options that would also address the FOMC’s behavior in periods of above- and below-objective inflation. Mester also shared her views on the broader debate on changes to the policy framework (Jan 17). She argued that clearer communication could be accomplished by linking individual policymakers’ rate paths with their macro projections.
Additionally, newswires confirmed that Williams is a candidate for Fed Vice Chairman. See “John Williams as Vice Chairman?” for our commentary.