Even as the incoming data have suggested that growth slowed substantially in the first quarter—to a 1% rate, in our estimation—policymakers have maintained that the economy is in a good position and that a gradual pace of rate hikes remains appropriate to meet the dual mandate objectives.
Policymaker Communications
Policymakers continued to agree that a change in reinvestment policy would be warranted sometime this year. Rosengren made the argument most forcefully, noting that “we’re basically at our unemployment mandate and we’re basically at our inflation mandate. So ideally we don’t have to manipulate the yield curve…That would be the reason why I would actually start the roll-off now. And since I think that a roll-off is necessary, starting sooner allows me to be quite gradual.” Fischer expected the financial market impact of tapering reinvestment to be more muted than the “taper tantrum” episode: “My tentative conclusion from market responses to the limited amount of discussion of the process of reducing the size of our balance sheet that has taken place so far is that we appear less likely to face major market disturbances now than we did in the case of the taper tantrum.” George saw more potential for market volatility: “Balance sheet actions have the potential to complicate interest rate policy. There is likely some tradeoff between adjusting interest rates and shrinking the balance sheet, but the specifics of the tradeoff are hard to quantify…this uncertainty and additional complexity raises the risk of a policy error or could spark a bout of financial market volatility.” She saw an “autopilot” process as optimal: “Once the process begins, it should continue without reconsideration at each subsequent FOMC meeting…The process should be on autopilot and not necessarily vary with moderate movements in the economic data…To do otherwise would amount to using the balance sheet as an active tool of policy outside of periods of severe financial or economic stress, and would increase uncertainty rather than reduce it.”
As for the likely funds rate path for the remainder of the year, Fischer shared that his expectation of two additional hikes this year remains intact: “So far, I haven’t seen anything to change that.” The implications of Fed rate hikes on foreign economies was a topic of interest at the semi-annual World Bank/IMF meetings. He argued that “the Fed’s removal of accommodation will be driven by a continued expansion of the U.S. economy; thus, foreign economies are likely to benefit from the developments that induce the FOMC to tighten.” When asked about how comments on the U.S. dollar from the White House affect Fed policymaking, he revealed that the FOMC does “not take a particular statement, by even a president, into account in making our decisions on the interest rate.” He further noted: “The markets know how to price the dollar fairly well, and the dollar has actually been depreciating lately, and that’s of some help, but it wasn’t part of our plan.” Rosengren reiterated his view that “it is appropriate to continue to be raising the short-term federal funds rate,” arguing that “the economy is strong enough to sustain that right now.” George’s view of the funds rate trajectory depended on highly uncertain fiscal policy projections: “Trying to gauge the impact of fiscal policy, as you know, is a challenge right now, and so my own forecasts have not incorporated that.” She noted, “I’m looking to continue the process of normalization and that requires that you can’t pin down the number today…the strategy of going gradual has been one I’ve supported, but whether that means we’ll get four moves, three moves, or no more at all, will be a function of how we see the outlook unfold.” She also cited housing as a disappointing force: “Housing has not come back in the way that we might like to see it given its importance to the economy.”