Last week, President Dudley defended the FOMC’s decision to raise rates in March as appropriate as part of the FOMC’s strategy of normalizing rates: “By taking out a little bit of that accommodation—moving up interest rates just a little bit—we think it’s more likely we’ll achieve a soft landing, and keep the economy about where it is today in terms of employment and inflation.” He emphasized that “it’s a delicate adjustment. It’s not something that’s very harsh.” Whereas President Dudley had previously seen downside risks to the outlook, among other reasons, arguing for “patience,” he’s now sounding more like President Mester. She dissented in 2016 because she thought it was appropriate to raise rates and has been arguing that “an upward policy path will help prolong the expansion, not curtail it.”
As we noted in our Weekly Update last week, President Kashkari identified himself as one of the few remaining members of the “patient” camp on the FOMC with his dissent at the March FOMC meeting and subsequent remarks. President Bullard remained in the cautious camp, countering the consensus view outlined by President Dudley, among others: “We do not need to be preemptive in this situation…Some of my colleagues seem to think you really have to get out in front with a faster pace of rate increases in order to keep inflation and unemployment where they are. I don’t think you have to do that. I think you can take much more of a wait-and-see posture.” He continued to see FOMC participants’ views on the appropriate pace of funds rate hikes, as implied by the dots, as “potentially overkill.”
Comments by other presidents confirmed that while the consensus was at three hikes, a number thought four moves would be appropriate. President Kaplan called the median projected pace of three hikes a “reasonable baseline,” and President Evans made similar remarks. President Williams said that “the median view of my colleagues of, say, three or maybe even more increases this year makes sense to me.” President Mester said, “I actually built into my forecast more than three [funds rate hikes in 2017] because I have the economy a bit stronger.”
Policymakers continued to indicate that balance sheet policy is a main focus of discussion within the FOMC right now. President Kaplan suggested that, “We’re approaching a period where we’ll have made some further progress and we’ll be able to make an announcement on our plans for the balance sheet.” He advocated allowing both Treasury and MBS holdings to run off the Fed’s balance sheet, but said that “we just have to tailor our plan to each of those types of securities.” President Williams was a bit more specific on the timing of an announcement on balance sheet policy: “We’re not quite there to well under way. But I would expect that, assuming the economy progresses as I expect and we raise interest rates a few more times this year, that it will be closer towards the end of this year to be ready to start that process of normalization of the balance sheet.” Likewise, President Mester said that, “if economic conditions evolve as I anticipate, I would be comfortable changing our reinvestment policy this year.”