MNI: Fed In No Hurry, Cuts Likely Over Medium-Term - Jefferson
MNI (WASHINGTON) - Federal Reserve Vice Chair Philip Jefferson said Tuesday the current stance of monetary policy is well positioned to deal with both sides of the central bank's mandate, though he continues to expect a gradual reduction in interest rates toward a more neutral stance over the medium term.
"The U.S. economy is starting the year in a good position. I expect inflation’s slow descent to continue, and I anticipate that economic growth and labor market conditions will remain solid," he said according to prepared remarks. "As long as the economy and labor market remain strong, I see it as appropriate for the Committee to be cautious in making further adjustments."
Jefferson said he's attaching a high degree of uncertainty to his economic projections in the current environment, but noted risks to achieving the Fed's employment and inflation goals are roughly in balance.
"Over the medium term, I continue to see a gradual reduction in the level of monetary policy restraint placed on the economy as we move toward a more neutral stance as the most likely outcome," Jefferson told the economics department at Lafayette College in Pennsylvania. "That said, I do not think we need to be in a hurry to change our stance."
Annualized inflation over the past three months has been closer to the Fed's 2% goal but the path of disinflation has been bumpy and that will likely continue, he said. Jefferson expects some further softening in the labor market that could cause the unemployment rate to edge "just slightly higher" this year but stay in a range consistent with recent readings.
EXPECTING FURTHER PROGRESS
"With supply and demand conditions having moved into better balance, wage growth slowing to a more sustainable pace, and longer-term inflation expectations remaining well anchored, I see a path for inflation to continue its progress toward our longer-run goal," the official said.
The FOMC reduced its policy rate by 100 basis points in three meetings at the end of 2024 to a range of 4.25% to 4.5%. Jefferson supported the move at last week's meeting to hold steady because inflation "remains modestly above our target" and the labor market is solid. The central bank's policy stance is "now significantly less restrictive than it was when we began lowering the federal funds rate," he said. (See: MNI INTERVIEW: Fed Rates Likely On Hold Through 2025-Croushore)
Jefferson said he can envision a "range of scenarios for future policy." If the economy remains strong and inflation does not continue to move sustainably toward 2%, the Fed can maintain policy restraint for longer, he said. Alternatively, if the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, it may be appropriate to reduce the policy rate more quickly.