Following the employment report on Friday, Williams said the release “was overall consistent [with] above-trend job growth.” On GDP, he noted that “we’re in a great place; the economy is doing well…It’s nice to see further confirmation that that first quarter GDP number was an aberration.” He noted later on that “our estimates tend to tell you there’s not only no slack today, but actually the economy is operating above potential.” He saw the current pace of job gains as unusual: “We do need to see the pace of job growth get to more sustainable levels,” citing a range of 80K to 100K as a more normal pace. Rosengren saw the strong labor market as supporting a stance of policy tightening: “[Unemployment is] already low…That would imply continued pressure on labor markets.” As a result, he was “a little worried that we need to take away the accommodation” and wants “to continue to be doing it gradually.”
The timing of a change in reinvestment policy continued to be a key focus. Williams said “late this year makes sense to me.” Later, Williams argued that “we want to move our balance sheet down to more normal levels for a number of reasons,” including reducing MBS holdings so the Fed has room to buy them again later if needed. Bullard saw the upcoming change in reinvestment policy as having been “delayed a little bit too long.” He called for an earlier announcement and allowing shrinkage “maybe sometime in the second half of the year.” In a separate event, he said asset purchases might be a necessary tool in a future downturn. He also noted that the balance sheet could be shrunk to $2 trillion, so “we’ve got a long ways to go and we might as well get started.” Mester said: “I would be comfortable changing our reinvestment policy this year, with clear communication in advance about how we plan to implement the change. My preference is that once we decide on a plan, we stay with it.” In a panel discussion, Evans revealed that he had “some sympathy for the old model of scarce reserves.”
On rate policy, Bullard continued to be a dovish outlier, noting that he was open to one more rate hike this year, in contrast with the FOMC consensus of two or three additional rate hikes. The scope and efficacy of tools available to counter the next downturn was also a topic of interest. Williams argued that an environment of historically low rates will likely limit the options of central banks in future downturns. On a panel discussion, Rosengren thought that “we’re likely to be at the zero lower bound more frequently” and highlighted the limitations posed by the effective lower bound, noting that “it is not at all uncommon to lower the federal funds rate by 500 basis points.” Williams made a similar point: “We might start the next recession with an interest rate of 2 or 3 percent as a starting point, and having very little room to cut.”
Williams devoted a speech to advocating for more-serious consideration of price-level targeting, expanding on an approach he proposed last year. He said that flexible price level targeting “merits very serious consideration” and would be superior to an inflation target. In a broad discussion on the role of policy rules, Fischer defended the currently limited role of policy rules, noting that they serve as “a useful starting point for FOMC deliberations.” He argued that circumstances such as financial crises and structural economic changes necessitate deviating from rules, and a committee often discerns these shifts “more promptly than would a statistical exercise.” For example, a couple of participants demonstrated the uncertainty of r-star estimates this week. Williams also noted: “The balance sheet is actually making r-star appear to be higher than it really is, so when we remove the large balance sheet, our estimates — I would predict — of r-star will actually go down.” Bullard saw “the natural rate of interest, and hence the appropriate policy rate, [as] low and unlikely to change very much over the forecast horizon.”