The usual split among policymakers concerning a December hike remained. This weekend, Yellen declared that the FOMC continues “to expect that the ongoing strength of the economy will warrant gradual increases in that rate to sustain a healthy labor market and stabilize inflation around our 2 percent longer-run objective.” Although she acknowledged that recent inflation readings were “surprisingly soft” her “best guess is that these soft readings will not persist, and with the ongoing strengthening of labor markets, [she expects] inflation to move higher next year.” She also noted that outlook uncertainty “is by no means limited to inflation”; she noted that “wage indicators have been mixed, and the most recent news, on average hourly earnings through September, was encouraging. On balance, wage gains appear moderate, and the pace seems broadly consistent with a tightening labor market once we account for the disappointing productivity growth in recent years.” She also cited a likely-rising r-star as supporting the argument for further gradual hikes.
Some, but not all, policymakers shared Yellen’s view. Rosengren also cited emergent wage pressures. Kaplan saw the usual cyclical forces that would raise inflation as being offset by “intensifying” forces such as technology and said of the cyclical pressures, “Over time we’ll see them emerge.” Williams expected a “gradual pace of increases over the next two years, bringing the federal funds rate to its new normal of 2.5 percent, to be appropriate.” Powell, whom we see as one of the leading candidates for Fed Chair, said: “It’s likely that the process of normalization will proceed without significant disruption.” He observed that the market reaction to policy tightening so far has been “benign…but significant risks of more adverse scenarios remain.” He warned that concern over rapid shifts in market sentiment “may be especially relevant at present, given the low level of volatility and elevated asset prices in global markets, which may increase the likelihood and severity of an adjustment.”
Brainard and Evans disagreed with the consensus. Brainard cautioned, “There does seem to be a very important, persistent, underlying trend in inflation, and there, a lot of the time-series work would suggest that we have actually seen a reduction in the underlying trend rate of inflation that’s material.” She argued that the temporary-factors story alone was not sufficiently convincing: “Temporary factors seem to be an important explanation. But just as this year we saw temporary factors driving inflation down a bit, we saw temporary factors last year driving them up a bit. So that too cannot fully account for what we’ve been observing in the inflation data.” One additional worry was that an undershoot of the inflation objective could threaten inflation expectations. Evans thought “It might take something like 3.5 percent” unemployment to raise inflation: “We’re pretty close to full employment but stronger wage growth would reinforce that idea better.” He also alluded to the symmetric nature of the inflation objective: “We’d be well served in trying to get inflation up, even if that meant inflation went to 2¼ or even 2½ percent—I think that’s what a symmetric inflation objective means…I really don’t see any harm in waiting longer just to take more stock of the inflation situation.”
Yellen also noted that “broader financial stability risks depend on more than just asset prices and it may also be important just why asset valuations are high. So one factor that clearly comes into play is an environment of low interest rates and central bankers like many market participants have been adjusting our notions of [likely longer-term yields.]” Fischer said he did not think that “we’re in a situation where we have an inflationary bubble, an unsustainable set of prices in the asset markets.” Evans saw current financial stability risks as “moderate.” On a related note, Potter—who heads the Markets Group that executes Fed operations in financial markets—believed that balance sheet normalization “will not disrupt the mortgage market or Treasury debt issuance.”
Additionally, Fischer has retired from his position as Fed Vice Chairman. Randal Quarles was sworn in as Vice Chair for Supervision. Accordingly, he will attend the October-November FOMC meeting.