One interesting question: When do we stop calling the balance sheet "large"? We're clearly not back to normal yet, but with IOER moving higher and currency growth faster than expected, the longer-run level of the balance sheet seems like it's going to be a lot bigger than Fed officials might have thought at the start of runoff. Goldman Sachs projecting the unwinding end date to April 2020 and a $3.6 trillion total balance sheet, analysts said in a note on May 18, and they said "an even earlier end is possible."
This line reflects an ongoing conversation at the Fed. A few officials, including Lael Brainard and Eric Rosengren, have been bringing up the idea of counter-cyclical capital buffers: basically asking the largest banks to boost capital levels to protect against financial stability risks as the expansion gets long in the tooth and financial vulnerabilities broaden.
Fed officials are still puzzling over the wage picture. Several of them, including soon-to-be New York Fed President John Williams, say still-gradual wage growth is a major reason that they're comfortable being patient in raising rates even as inflation reaches their 2 percent goal.
This "before too long" signals that the committee is still kicking the can down the road when it comes to deciding between a floor or corridor system for setting rates. Refresher: they're currently using a floor system, which has set rates using interest on excess reserves as an upper bound and overnight reverse repurchase as a floor, in practice. Pre-crisis, they used a corridor system, in which the Fed set rates with open market operations. Which method they use in the longer run will help to determine how large the balance sheet has to be (a floor system calls for a bigger balance sheet).
This is an important line on inflation. The Fed is telling us that because they expect PCE to move higher as swings from last year fall out, a mechanical step-up isn't going to change their path. I expect we'll be quoting this line if/when PCE moves higher when we get the March data on April 30.
This two-handed economist bit seems to really encapsulate the debate on the committee right now. Can we improve the potential of the economy by keeping rates low, and if so, how much would that cost financial stability?
The full employment debate is raging on, and these minutes really underline that. Some members of the committee want to discount headline unemployment as a useful measure of whether slack is gone, given demographic changes in the workforce, like higher education. Not everyone agrees. That's significant, because if we're not undershooting the natural rate of unemployment, there's less of a need to rush rate increases to fend off inflation.
This "range rather than point estimate" idea is interesting. The Fed only recently adopted a numerical inflation target formally to begin with, though, so I think it'll raise the question: if you have a range, does that just send them back to informally targeting 2 percent?
On this 'local Phillips curves work' point -- in fact, some of the latest Fed research on this topic says that while local Phillips curves do work, they've become a lot flatter since 2009. That's from a paper by Sylvain Leduc and Daniel Wilson at the San Francisco Fed
When participants talk about making up for "past deviations" from the inflation target, they're talking about possibly price-level targeting. That's an idea regularly floated by San Francisco President John Williams. Former Chair Ben Bernanke has voiced support for temporary price level targeting.
Any concern over easing financial conditions should have evaporated somewhat since the January meeting. Financial conditions have tightened amid higher volatility.
The participants cite a lack of wage growth here. It's worth noting that we've had a jobs report since this meeting that provided early evidence that average hourly earnings may be moving higher. If other indicators back that up, wages could become another sign that we're knocking on full employment's door.
One thing that surprises me a little is that the Fed staff says uncertainty surrounding its inflation forecasts is about average. I'd expect them to view uncertainty as heightened at a time when we're not really sure why the Phillips curve hasn't kicked in and as technology and globalized labor markets shake up company pricing power.
This nod toward the idea that globalization and technology might be holding down inflation could get more airtime this year if price gains fail to accelerate. The longer weak inflation holds, the harder it might be to explain it away as "transitory."
This reference to companies finding ways around wage increases is pretty interesting -- this has been a consistent story in recent Beige Books. One big question for wages in 2018 is how long businesses can continue to offer perks like flexible work schedules in lieu of cash.