The volatility in financial markets captured the attention of a number of policymakers. On Wednesday (2/7), Dudley said stock market developments had “no consequence” on his economic forecast and didn’t think “it’s a big story at all for central bankers.” He said it would become a factor if it continued to fall sharply, noting, “It’s still up sharply from where it was a year ago.” On Thursday, he stressed that so far it was “small potatoes.” Evans (2/7) allowed that these developments might affect consumer spending: “Can I imagine consumer sentiment moving in response to financial markets? Yeah, I can.” He thought the financial market response was disproportionate: “You could say it’s an outsized response, given the large percentage adjustment in equity prices, and the rebound, relative to a couple of numbers.” Kaplan (2/7) said on Wednesday he did not think the volatility had implications for the macro economy: “What I look at is whether it has implications for financial conditions or the health of the underlying economy and I would say I don’t think so.” He argued that “It’s healthy that there is some correction and that there is even some volatility, that is a healthy thing.” On Thursday, he said that a “market adjustment in and of itself would not influence” his rate-hike outlook, adding, “At this point I don’t see this market adjustment spilling over to financial conditions.” Harker as of Thursday (2/8) held a similar view; his outlook and projections for business investment and PCE were unchanged. Bullard noted on Tuesday that valuations “look high compared to historical norms.”
The strong January employment numbers continued to be a focus, as it was cited as one reason behind financial market movements. Evans (2/7) repeated his preference not to hike until mid-2018. He argued that by mid-year, if inflation surprises to the upside, then “we still could easily raise rates another three or even four times in 2018 if that were necessary.” He thought that “There is a hint that [higher inflation] may be in train today.” His projected unemployment rate falls to 3.5% by the end of 2020. Kaplan said “we are likely to overshoot full employment” and “we have an [inflation] undershoot.” He floating the possibility of a flatter Phillips curve: “If the Phillips curve is flatter one of the questions is maybe we’re using a tool that has a potent impact on labor slack, but a less potent impact on inflation.” Harker (2/8) shared a similar view: “[It’s been] either flat or nonexistent for decades.” He also raised the possibility that wage increases were absent only in the middle zone of the skill spectrum: “It’s just this compositional shift demographically that may be keeping wages down and hence inflation down.” His rate hike views continued to be on the more dovish side: “I still have penciled in two because I’d like to see us slightly overshoot our 2% inflation target, but I think there are some risks to the upside, where I would be open to three going forward.” Bullard warned against interpreting labor market strength as translating into stronger inflation: “Continued strong labor market performance is unlikely to translate into meaningfully higher inflation because Phillips curve effects are weak” (2/6). To him, inflation expectations “remain a bit low.” He concluded, “I don’t think we have to be preemptive [with rate hikes.]” Williams (2/7) warned of the lags associated with monetary policy: “The full effects of a change the FOMC makes today are unlikely to be felt for two years.” Dudley (2/8) noted that three hikes remained “very reasonable.”