MNI: Fed’s Jefferson-Higher Bond Yields Can Affect Policy Path

Rising yields on long-dated U.S. bonds should factor into policymakers’ deliberations about whether to tighten monetary policy further, Fed Vice Chair Philip Jefferson said Monday.

“I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy,” Jefferson said in a keynote speech to the National Association for Business Economics.

Jefferson offered a balanced view of risks, emphasizing both the threat of more persistent inflation than expected as well as the possibility of a sharper growth slowdown than is currently on investors’ radars.

“I am particularly attentive to upside risks to inflation, such as those associated with the economy and labor market remaining too strong to achieve further disinflation, as well as risks associated with unexpected increases in energy prices,” said Jefferson.

“But there are also important downside risks to economic activity, such as the slowdown in foreign economic growth,” he added, citing a loss of momentum in China and weaker activity in Europe.

He said inflation is still too high and the labor market remains tight but argued things are heading in the right direction.

“I believe that core PCE prices will moderate further as the labor market comes into better balance,” Jefferson said. (See MNI POLICY: Softer Trend Inflation Boosts Case For Fed Pause)

Improvements in labor supply are helping to put employment on a more sustainable track, he said. “Since the start of the year, the prime-age labor force participation rate has moved up further. Immigration has also picked up, further contributing to the increase in labor supply.”