Photo: Federal Reserve / Wikimedia Commons (Public domain)
Federal Reserve Vice Chair Philip Jefferson said on Friday that inflation — not economic growth or the jobs market — will decide his next vote on interest rates, a signal that he may support further rate hikes if price pressures stay stubborn.
With the economy growing and the labor market stabilized, Jefferson said he is now taking his policy cues from inflation. The remark suggests the Fed's number two official could back another increase to bring prices under control.
Inflation Is Now the Deciding Signal
"Data received since that meeting have been consistent with economic activity and labor market conditions remaining broadly solid, while inflation readings show persistent price pressures," Jefferson said in remarks prepared for delivery at the University of California, San Diego.
"Accordingly, I see the trajectory of inflation as providing the more important signal for determining the appropriate stance of monetary policy."
Jefferson joined the 10-2 majority of Fed policymakers who voted at their October meeting to wait for more data before considering a rate hike. The Fed held its target range at 3.75% to 4.00% on October 28, with two committee members favouring a quarter-point increase.
"Going forward, I believe that further policy adjustments should be determined by carefully examining trends in the data, the evolving outlook, and the balance of risks," he said.
Other Officials Are Talking Tougher
Jefferson's comments came as other Fed policymakers have been explicit in recent weeks that elevated and persistent inflation means they would likely support rate hikes that are bigger, or come in quicker succession, than the single quarter-point increase the Fed delivered in September. Jefferson himself gave no such guidance.
The latest data have kept the pressure on. Consumer prices rose 0.4% in October, above the 0.3% Wall Street had expected, while core prices — which strip out food and energy — also rose 0.3%. Producer prices rose 0.3% in October as well. Markets now treat a rate rise at the Fed's December 8-9 meeting as highly likely, with the odds of a half-point move rising above 12%, according to CME FedWatch data cited in market reports.
Jefferson Warns AI Could Push Borrowing Costs Higher
Jefferson was more forthcoming about his views on artificial intelligence, which he forecast would boost productivity substantially but gradually, bolstering economic output and income while causing pain for some workers and businesses.
"One risk to my baseline outlook is that the new technology could displace workers much faster than they can adapt and retrain, which could result in an increase in unemployment," he said. "Monetary policy can affect cyclical conditions, like a temporary downturn in employment and spending, but it cannot address the structural factors that determine long-run rates of employment."
AI adoption could also result in higher overall borrowing costs in the economy, he said, if companies find themselves needing to continually increase their investments to keep up with a permanently higher pace of productivity growth.
Sources: Reuters; Federal Reserve.