Fed's Jefferson Says Inflation Path Will Guide Rate Decisions

Federal Reserve Vice Chair Philip Jefferson has signalled that the path of inflation, rather than the job market, will weigh most heavily on his view of where US interest rates should go next, according to the text of a speech he delivered on Friday at the University of California, San Diego Economic Roundtable.

Jefferson said he sees the trajectory of inflation as the more important guide for setting the stance of monetary policy, and that any further adjustments should depend on trends in the data, the evolving outlook and the balance of risks. The speech, published by the Fed, carried the usual caveat that the views were his own and not necessarily those of the Board or other policymakers.

Inflation well above target

According to the speech, the 12-month change in the personal consumption expenditures (PCE) price index stood at 3.6 per cent in September, while core PCE, which strips out food and energy, was 3.1 per cent. Both remain notably above the Federal Open Market Committee’s 2 per cent goal, Jefferson said, adding that data received so far for October pointed to inflation staying well above target.

He named higher energy costs as one driver, with effects showing up in airfares and transportation. He also pointed to the boom in demand for new technologies, which he said has pushed up costs for goods and services relying on the same inputs, such as memory chips. He said he remains concerned that higher energy prices could lead to “a persistent rise in inflation more broadly.”

Short-term, survey-based inflation expectations are elevated, mainly because of energy prices, while longer-term measures have stayed consistent with 2 per cent inflation, he noted.

Growth and jobs holding up

On the other side of the Fed’s mandate, Jefferson described an economy that has gained momentum this year. Gross domestic product grew at a 3.4 per cent pace in the third quarter, business investment has been strong and consumer spending resilient, he said.

The unemployment rate settled at 4.1 per cent in October, a level he views as consistent with maximum employment and expects to hold in the near term. Layoffs remain low, job openings have edged up and payroll gains have broadened across sectors, he said, describing the risks to his growth and employment forecasts as roughly balanced.

Jefferson said he joined the majority of his colleagues at last month’s policy meeting in voting to hold the federal funds rate steady. Since then, incoming figures have shown activity and hiring remaining broadly solid while inflation readings point to persistent price pressures. He flagged Middle East tensions as a possible drag on activity and hiring, and a further surge in investment as a possible boost to growth.

The ANI news agency also reported the remarks, carrying the same inflation and labour market figures.

What’s next

The Fed holds its final meeting of the year on December 8-9, according to The Motley Fool, which reported that October consumer prices rose 0.4 per cent from the previous month against expectations of 0.3 per cent. The outlet said the central bank raised rates by a quarter point in September before pausing in October.

Fed Governor Christopher Waller said in a November 10 speech in London that a 50-basis-point hike should be considered in December, the outlet reported. Futures traders were pricing an 87 per cent chance of a quarter-point increase and a 13 per cent chance of a half-point move, it said. The next PCE price index reading is due on November 25.

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