Vice Chair Jefferson Takes January Inflation Surprise In Stride

There is little in Vice Chair Jefferson's speech at the Peterson Institute Thursday that shows any signs of deviating from the central view of the Committee. Jefferson reiterates the main themes from the January meeting minutes out Wednesday, with his commentary overall providing if anything a slightly more dovish take than most participants: he notes the FOMC (and he) believe rates have peaked and that "if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year". He sees a path to restoring price stability without substantial unemployment increases (ie a "soft landing").

• Of note: Jefferson has given the first Fed comments on PCE inflation since the January CPI and PPI reports, saying that Fed staff now estimate core PCE prices rose 2.8% Y/Y in January (close to sell-side estimates) - which incorporates what he calls a "somewhat larger" and "disappointing" CPI reading which "highlights that the disinflation process is likely to be bumpy."
• However, he highlights more constructively that on other timeframes, "the January data notwithstanding, the slowing in core inflation has been especially pronounced in recent months, as the 3- and 6-month changes in core PCE prices through January, at 2.5 percent and 2.4 percent, respectively, clearly remain below the 12-month change". So it doesn't seem that he's been swayed too hawkishly by the surprisingly strong January price data.

Jefferson's speech examines the context for previous Fed rate cut cycles, and again he seems to lean dovish here as he cites a litany of unexpected downside risks materializing. He notes that with the exception of July 1995's rate cut cycle initiation, most cycles start "because of concern about slowing economic growth", and overall, "history is replete with events that complicate monetary policy decisions", suggesting the need to "remain vigilant and nimble".

• Overall, he asks, "Will this time be different? My answer is, of course it will". He sees "at least three key risks" to his otherwise cautiously optimistic outlook: 1) consumer spending remaining more resilient than expected, 2) unemployment could weaken on softer economic growth, 3) geopolitical risks could remain elevated.