STANFORD: Federal Reserve Vice Chair Philip Jefferson on Thursday suggested he would be open to raising interest rates if there is no near-term improvement in inflation, though for now he believes it will be enough to hold short-term borrowing costs steady as the Fed did in June.
"This policy stance should continue to support the labor market while allowing inflation to resume its decline toward our 2% target as the effects of past tariffs and energy prices pass through completely," Jefferson said in remarks prepared for delivery at the Stanford Institute for Economic Policy Research.
"That said, in a scenario where actual inflation does not start to cool down soon, I believe that it could be appropriate to reconsider our current policy stance to ensure we fulfill our commitment to deliver price stability." The Fed next meets to decide rates on July 28-29. After government data published this week showed consumer price inflation had cooled in June, traders have largely exited any expectation for a rate hike this month.
Even so, policymakers are wary of banking too heavily on one month of improvement after months when inflation moved in the wrong direction. A few feel a rate hike is already called for, notably Dallas Fed President Lorie Logan in remarks made earlier Thursday. That will set up a vigorous debate around the table in Washington in two weeks.
Jefferson made clear he is not in that hawkish camp, calling current Fed policy "well positioned," a phrase often employed by central bankers to signal they do not see an urgent need to change policy. But his remarks were notably weighted more heavily with concern around inflation than around the labor market, which has been stable.
The conflict in the Middle East and the rise in fuel prices, he said, are likely to have only a muted effect on demand, but push up on price pressures already elevated by last year's tariff increases.
"The quick succession of shocks raises the risk that inflation becomes entrenched and inflation expectations become unanchored," he said. "The question of whether the recent increase in energy prices will feed into longer-term inflation expectations and result in a persistent rise in inflation is a critical one."
He said he is also paying close attention to AI, which could reduce inflation if it delivers productivity growth quickly, but could add to inflationary pressures if demand from stronger spending and investment comes first, he said.
"Optimism about AI may boost investment and consumption today, even before these productivity gains fully materialize," he said. - Reuters
