MNI: Jefferson Says Fed Rate 'Skip' Allows Time To Assess Data

Skipping an interest-rate hike would allow the Fed to better assess how much additional tightening is needed to bring inflation under control and shouldn't be seen as having hit peak rates, Governor Philip Jefferson said Wednesday, one of the strongest signals yet policymakers may coalesce around leaving rates unchanged until July.

"Skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming," he said in remarks prepared for an annual Fed conference on policy challenges for the financial sector in Washington.

"Inflation has come down substantially since last summer, but it is still too high, and by some measures progress has been decelerating recently, particularly in the core services sector," Jefferson said. Meanwhile, the amount of credit tightening stemming from the recent banking stress events is "not yet clear, and this uncertainty complicates economic forecasts."

BANK STRAINS

The Fed has raised its benchmark rate 500 bps in a year and that's "not a long enough period for demand to feel the full effect of higher interest rates," Jefferson said. "History shows that monetary policy works with long and variable lags."

Higher rates could exacerbate stress at banks, particularly those highly exposed to longer-duration assets and with a high ratio of uninsured deposits to total deposits, he said. Weakness in office and retail sectors of commercial real estate will also affect the credit quality of related loans and strain some lenders.

"While the resilience of the financial sector will limit the spillovers from recent events, I expect those strains to lead to a further tightening in credit supply from banks that will weigh on economic activity," he said.