The pace of rate hikes this year continued to be a central topic for policymakers. Dudley said the FOMC “would expect to gradually remove further monetary policy accommodation, snug up interest rates a little further, in the months ahead.” He also noted that “it’s really hard to factor [fiscal policy] into your forecast at this point.” Fischer saw the FOMC as being “more or less on the path” of its projections if they see further improvements in both inflation and employment. He noted that wage growth has resumed and is close to the Fed’s expectations.
As expected, Lacker represented the more hawkish side of the Committee: “I think we should be removing accommodation sooner rather than later.” He warned of the risk of being “behind the curve” and recommended the Fed “pick up the pace.” Similarly, Kaplan leaned more to the hawkish side: “Future removals of accommodation can likely be done in a gradual and patient manner. However, it is my view that moving sooner rather than later will make it more likely that future removals of accommodation can be done gradually.” Mester warned that “attempting to use monetary policy to spur productivity growth would be a risky experiment.” Rosengren, who has recently come out on the more hawkish side of the debate, argued that the funds rate would rise “at least as quickly…[and] possibly even a bit more rapidly” than three hikes in 2017. He warned that “if GDP is growing faster than potential and we reach both elements of the dual mandate, the Federal Reserve risks ‘overshooting,’ potentially jeopardizing the very significant progress of the U.S. economy since the financial crisis.” He also noted the significance of market expectations as a factor in funds rate decisions, although he argued that concerns about surprising the market would not prevent an otherwise appropriate move. Harker saw “three hikes as appropriate for 2017, assuming things stay on track.” Notably, his projections did not “[take] into account any changes in fiscal policy, at this point.” Later, he said he “would not take March off the table at this point, we’ll have to see how it plays out in the next few weeks.”
Lockhart, on the other hand, didn’t “feel there is a great deal of urgency” for rate hikes and didn’t “see really compelling reasons to move ahead in March.” In his observation, whether an FOMC participant projected two or three hikes in 2017 depended on whether they assumed fiscal stimulus in their baseline. For his part, he “felt it was too early” to factor in fiscal stimulus. He said he was “not dogmatic on two versus three” and “could be very easily persuaded that the economy is in a state where three moves are appropriate.” However, even he noted that “waiting for a long period of time for further improvement in the labor market is not a good posture for the Fed to be taking.”
Reducing the size of the Fed’s balance sheet was seen as a natural next step after further rate hikes. In response to questions during her testimony, Yellen claimed that there is “no unique level” that the funds rate must reach before balance sheet normalization begins, noting that the timing “depends on the strength of the recovery.” In contrast, Harker saw a funds rate between 1 and 1.5 percent as appropriate for beginning to tapering reinvestments. Dudley noted, as his colleagues have, that balance sheet reduction may substitute for rate hikes: “If we move to balance sheet normalization that might actually stretch out the process of raising short-term interest rates a bit.” He saw it as a “passive” rather than an “active” policy tool. Lacker expressed his desire to see the the balance sheet reduced starting this year. Mester argued that a smaller portfolio “may help guard against future calls for the Federal Reserve to enter into the realm of fiscal policy.”
Rosengren saw “very limited [labor market] slack remaining” and had “a little rosier” view of business fixed investment. He also expected “a little more strength” in housing construction. Lockhart saw the economy as being “quite close to achieving its mandated policy objectives of full employment and stable prices.” He saw inflation approaching the 2 percent objective “this year or next” and expected the labor market “to reach or even exceed most estimates of full employment.” Kaplan, who saw 2017 GDP growth at 2.3%, said: “We’re not at full employment, but we’re getting there.” He argued that “as slack continues to be removed from the labor force, the headline inflation rate should reach the Fed’s 2 percent objective in the medium term.” He also observed that “excess capacity outside the U.S. may be dampening inflation pressures in the U.S.”
Some participants discussed structural factors that have impacted the economy and prospects for potential growth. Kaplan pointed to technology and education: “Dislocations resulting from technology-enabled disruption are sometimes confused with the impacts of globalization…To the extent that there is slack in the labor market, it is primarily associated with lower levels of educational attainment.” Lacker also pointed to structural changes, noting that “matching those golden age growth rates…on a sustained basis might be a stretch.” Lockhart said he was “agnostic” that the economy would sustain growth above the 2-to-2½-percent range, warning that “accomplishing such a breakout requires offsetting demographic influences and accelerating productivity growth.” Rosengren, Harker, and Yellen pointed to possible changes in U.S. immigration policy as likely to affect potential growth.