Clarida explicitly aligned his views with Powell’s in terms of the ultimate size of the balance sheet: “I think the numbers…Powell has mentioned makes sense to me.” Clarida also said that “the ultimate destination…should be a lot smaller than it is today.” He also saw an important upcoming task to be determining “metrics” for when to stop balance sheet runoff. Like others on the FOMC, Clarida emphasized that when assessing the labor market it is important to look at “broader measures of the labor market,” not merely the unemployment rate, saying, “Behind that one number…is a very, very complex picture.” Clarida specifically cited labor force participation.
Williams said “[wage growth is] a serious reason, that I’m not that worried about inflation, or wage inflation, or price inflation, being on the cusp of an outburst” (May 16). But he remained hopeful for better data: “I do think that as the economy continues to run strong, unemployment continues to come down, we’ll see more of a pickup in wage growth.” Kashkari thought “There might be more slack than that headline” suggests; he added that wage growth should be much stronger (May 17). Bostic shared a similar view. He saw the unemployment rate as having undershot the NAIRU, but not by “that much” because of a lack of wage response. Kaplan thought the U.S. was at or past full employment (May 17). Mester thought that wage growth was “not a mystery if you think about low productivity growth” (May 14). She also “wouldn’t be surprised if we see the near-term inflation readings go higher.”
Bostic noted that his projection was “at three [hikes in 2018] now with the extra stimulus” (May 16). Kashkari argued that rates hikes should be paused at neutral to await more evidence that the economy is at full employment (May 21). Williams saw three or four rate hikes in 2018 as the “right direction” and argued that the neutral rate is likely to remain low. He linked the pace of rate hikes to the inflation overshoot: “this idea that it might overshoot by a few tenths, that wouldn’t bother me too much. But obviously, if we see the inflation pressures, wage pressures, all starting to build, that would argue for a somewhat faster tightening of monetary policy.’’ But currently, “inflation has just barely reached our 2 percent goal.” Referring to the “accommodative” wording in the statement, he noted “We’re still accommodative, interest rates are still below long-run levels, but over the next period of time, we’ll have to revisit that.”
Williams was not worried about the yield curve. “Am I worried today about the fact the yield curve is flat? No. Because I think that’s driven primarily by the fact that the Fed is tightening, long rates are moving up, but not surprisingly, not one-for-one…I don’t see that as a situation that we would be running into in the next year or so, but I think the answer to that depends on the context” (May 16). He was more motivated by the macro outlook, but added that he “definitely wouldn’t ignore signals we’re getting from the markets.”
But others continued to voice their worry about the prospect of an inversion. Kaplan warned, “I for one do not want to in the future knowingly create an inverted yield curve.” Bullard said: “if we go too aggressively to the point where we invert the yield curve I would take that as a very negative signal, and our risk of recession would go up.” Bostic was also unsettled by the prospect: “We are aware of [the inversion risk]. So it is my job to make sure that doesn’t happen.”