MNI: Jefferson Says Fed On Track To Bring Inflation Down

Federal Reserve Governor Philip Jefferson said Friday the central bank is on track to bring inflation down in his first speech since being nominated for vice chair by President Joe Biden, while acknowledging there has been little progress on core inflation.

"Since peaking last June, [PCE] inflation has declined about 2.75 percentage points — with nearly all the step-down explained by falling energy prices and slowing food prices. The bad news is that there has been little progress on core inflation," he said, noting disinflation in core goods prices is occurring at a slower pace than expected.

Current disinflation has been uneven and slower than liked, but monetary policy affects the economy and inflation with long and varied lags and the full effects of the Fed's rapid tightening are still likely ahead of us, he said. Additionally, tightening in financial conditions is likely to be augmented by the effects on credit conditions from recent strains in the banking sector.

The central bank’s benchmark rate has risen from close to zero at the beginning of last year to a range of 5% to 5.25% and a split has appeared among officials as to whether additional hikes are needed. (See: MNI INTERVIEW: Fed's Barkin 'Very Open' To More Tightening)

CREDIT SHOCK

Credit conditions are also tightening after the failure of Silicon Valley Bank and others. "Even though it is too early to tell, my view is that these incremental credit restraints will have a mild retardant effect on economic growth because the recent bank failures were isolated and addressed swiftly by aggressive macro- and micro-prudential policy actions," Jefferson said in prepared remarks. There is also "some downside risk that the incremental effect of the credit shock is larger than I expect."

Still, data continue to point to a strong labor market and wage growth has continued to run ahead of the pace consistent with 2% inflation and current trends in productivity growth, he said.

"Looking ahead, last quarter’s growth in consumer spending seems unsustainable," Jefferson said at the Hoover Institution event. "I expect slower consumer spending growth over the remainder of the year in response to tight financial conditions, depressed consumer sentiment, greater uncertainty, and declines in overall household wealth and excess savings."