There were remarks, by Williams, Kaplan, and Dudley, which focused on the interpretation of the Q2 GDP report and its implications for near-term monetary policy.
President Williams gave a press conference on Friday, shortly after the release of GDP data. He saw part of the weakness in Q2 as the result of volatility in inventories, but he thought final sales were sound. He said lower neutral rates make monetary policy less effective: “I think interest rates, even when we’re past this business cycle, will be lower.” He also noted that potential GDP growth has fallen as a consequence of falling productivity growth: “an economy that is growing more slowly doesn’t need to invest as much.” On the rate hike path, he argued that moving gradually helps avoid surprises. Despite the low reading of Q2 GDP, he continued to view up to two rate hikes in the remainder of the year as possible, depending on the incoming data. But the message was really about data dependency. Two hikes were still “possible,” but so was one or none: “There’s definitely a data stream that could come through in the next couple of months that I think would be supportive of two rate increases; there’s data that we could get that wouldn’t be supportive of that, it could be one, maybe, or none. Time will tell,” I read this as less confident in the outlook and therefore in the chance of two moves as being appropriate.
President Kaplan, like President Williams, said a rate increase in September was still possible. “September is very much on the table but I think we’ll have to see how events unfold and so it’s too soon to jump to a conclusion,” and that the negative surprises in the GDP report should prompt patience and caution: “A [GDP] number like this makes you want to see more information…if we’re not that accommodative, we can afford to be patient.” Nevertheless, he sounded more optimistic when he said “these inventory adjustments can work themselves out” and that he is “still hopeful” for stronger growth.
President Dudley echoed the patient and cautious sentiment, noting that risk management was a key reason for proceeding cautiously: “we need to be a bit more careful about the risk of tightening monetary policy in a manner that proves to be premature, as compared to the alternative risk of being a little late.” He added that the balance of risks was negative: “the medium-term risks to the U.S. economic growth outlook are somewhat skewed to the down side.” Nevertheless, he echoed Williams and Kaplan in saying that: “I think it is premature to rule out further monetary policy tightening this year.” He specifically noted that market expectations were too complacent: “market expectations derived from futures prices—which price in about one 25 basis point rate hike through the end of 2017—appear to be too complacent.” He suggested that the market was underweighting upside risk: “market expectations may be putting insufficient weight on the possibility that the economy could outperform our expectations, that financial conditions could ease, or that the risks to growth from Brexit and other international developments could fade away.”