Brainard’s speech (Sep. 12) was particularly noteworthy because she has a dovish reputation but her remarks suggested a hawkish path of rate hikes. She argued that “continued gradual increases in the federal funds rate are likely to be appropriate to sustain” full employment and price stability. Evans’ views have also turned more hawkish of late. Last week, he expressed yet more openness to a December hike: “Certainly three to four total increases for the year are reasonable. The data have been strong. I would not be surprised if it is four increases this year” (Sep. 14). In contrast, Bostic thought “we should still be at three moves” for 2018, pointing to last week’s weak CPI data (Sep. 13). Bullard continued to see the current stance as “already neutral or possibly somewhat restrictive” (Sep. 12).
Participants generally agreed on the need for the funds rate to reach neutral at the very least, but were divided on overshooting neutral. Brainard thought that, as a result of fiscal policy changes, “the shorter-run neutral rate [rising] somewhat higher than the longer-run neutral rate” over the next couple years was a reasonable expectation. Therefore, it is now more likely that the funds rate will overshoot its longer-run neutral (2.9% as of June). She seemed to imply that the median SEP pace of rate hikes would be sufficiently gradual for the FOMC to assess the stance of policy without requiring a pause, which is contrary to arguments that some others have advocated.
Evans saw a need to return to “more conventional, mainstream monetary policy.” He thought that the June SEP for 2019 (3.1%) and 2020 (3.4%) was “mildly restrictive”–a stance that would be “quite normal” given an unemployment rate projected to be below the NAIRU. He appeared to dismiss the importance of a yield curve inversion as a factor preventing tightening, citing secular factors holding longer-term yields down. As such, it would be “premature to put too much weight on that indicator.” Brainard shared this sentiment., characterizing the yield curve as “one of several” considerations.
Kaplan saw a need for the funds rate to rise “gradually to a neutral level” (Sep. 14). Bostic, too, thought rate policy should move “toward a neutral stance,” that is, “a gradual increase in nominal interest rates over the next handful of quarters.’’ He also wanted the FOMC to pause rate hikes after reaching neutral (Sep. 10). A material concern was that “the negative effects of sustained tariff worries on U.S. business investment could easily grow.” Barkin, too, warned that “one area where I believe we are seeing a clear impact is confidence” (Sep. 14). He concluded: “Uncertainty is bad for business…So in addition to the effects on sales and prices, the extent to which trade policy affects confidence is something I’ll be watching very closely.” Brainard thought “it would be hard to say there’s a discernible impact in the aggregate numbers overall, either in prices, or in confidence, which is quite high.”