Following the FOMC meeting, a couple of policymakers discussed the appropriate pace of rate hikes, reiterating the consensus that rate hikes should continue at a gradual pace. Kaplan’s base case was three hikes this year, but an additional hike could be warranted (Jun 15). However, he was “very mindful of the fact that part of the strength of the economy in 2018 is fiscal stimulus” and “also mindful that we expect that’s going to fade to some extent in ‘19 and ‘20.” Dudley argued that keeping inflation under control is of vital importance for sustaining full employment: “Inflation in check is sort of a necessary condition to keep the economy in a position where it can actually keep employment at a high level” (Jun 15). As such, “The federal funds rate will probably have to climb a little bit above neutral, because the unemployment rate is already — from most people’s vantage points — below a sustainable level of unemployment consistent with stable inflation.” The idea of pausing at neutral received further mention. Kaplan noted: “that’s the kind of decision I don’t want to prejudge now. It’s the kind of decision I’ll look at a whole range of factors when we get to that point…strength of the economy, what’s going on globally, what’s going on in the financial markets, what’s going on with the yield curve.”
The consequences of monetary policy actions on financial markets has again emerged as a topic of debate. Like Powell, Kaplan avoided attributing the updrift in effective feds funds to scarcity of excess reserves: “I don’t think I’m ready to say definitively whether it’s scarcity of reserves or some other reason.” We suspect this caution was to prevent a perception that this development would affect the established balance sheet normalization plan. Dudley, too, thought that “the evidence at this point is not that strong” that the demand for reserves is higher than they previously thought. But he didn’t “think it’s a huge problem or issue if it turns out that the banks…demand a trillion dollars of excess reserves versus $500 billion of excess reserves, and that would cause us to stop the balance-sheet normalization process somewhat earlier.” In response to recent discussion on the proper role of Fed policy as it pertains to global financial conditions, Dudley noted that “There has been some spillover, potentially, to emerging-market economies, but again, it’s also hard to sort of say how much of that is due to the normalization of the balance sheet versus other factors.” Kaplan argued that U.S. monetary policy always presents a risk of spillover into other financial markets and that policymakers would take this into account as they devise policy.