FOMC participants continued to debate the appropriate pace of rate hikes this year. Consistent with our deductions from the December dots (see our commentary), Harker saw only two hikes as likely to be appropriate as a result of his inflation outlook: “Inflation continues to run below target…I expect inflation will run a bit above target in 2019 and come down to target the following year, but I am more hesitant in this view than I am on economic activity. If soft inflation persists, it may pose a significant problem” (Jan 5). He was not worried about the economy overheating; rather, he seemed to echo Evan, saying, “it would actually be helpful if we were able to get inflation not just at 2%, but above it for a while.” He was less convinced of the threat posed by the shape of the yield curve: The current situation is not “analogous to the inversion associated with the stagflation of the ’70s and ’80s.” Nonetheless, he cited the possibility of a yield curve inversion as another factor supporting a slower pace: “At this point I don’t think we should do anything that would precipitate any inversion of the yield curve, or other things.” Bullard was concerned about yield curve inversion: “I would not want the Fed to push so hard that we get to an inverted yield curve situation” (Jan 4). Bullard thought the positive impulse from fiscal reforms meant the FOMC could “afford to wait and see which way [the net effect of tax reform] goes” before deciding on the next rate hike (Jan 5). Williams, on the other hand, continued to endorse the December FOMC median projection of three hikes in 2018: “Something like three rate hikes makes sense.” He was optimistic about the economic outlook, saying the economy would likely be “in a very positive place two years from now: I think we’ll be at 2 percent inflation and around 4 percent unemployment” (Jan 6).
A few FOMC participants also commented on longer-run strategic issues. The proximity of the effective lower bound motivated discussion of strategies to respond to downside risks. Harker said there was a need “to consider the possibility of a new economic normal that forces us to reevaluate our targets.” Mester concluded that “None of these alternative frameworks [raising the 2 percent inflation target, permanent and temporary price-level targeting, and nominal GDP targeting] are without challenges and we will need to evaluate whether the net benefits of any of the alternatives would outweigh those of the flexible inflation-targeting framework currently in use in the U.S.” (Jan 5). Bullard argued that “inflation targeting has been successful in those countries that have implemented it” (Jan 4). He saw this success as having led to an essentially flat Phillips curve. He raised the possibility of using policy rules to guide rate expectations: “One could tie private sector expectations down still further by credibly committing to a monetary policy rule, such as a Taylor-type rule.”1