Fed’s Jefferson urges proceeding ‘slowly’ with monetary policy

• Key Insight: Federal Reserve Vice Chair Philip Jefferson said he supported the 25-basis-point rate cut at the October FOMC meeting to support a labor market showing signs of weakness. With uncertainty over whether official data will be available by December, Jefferson said he is relying on input from business and community stakeholders to gauge the labor outlook.
• Expert Quote: “The current policy stance is still somewhat restrictive, but we have moved it closer to its neutral level that neither restricts nor stimulates the economy. Given this, it makes sense to proceed slowly as we approach the neutral rate.” – Fed Vice Chair Philip Jefferson.
• What’s at stake: If the government shutdown and the attendant lack of official economic indicators extends into December, the Federal Reserve may have to navigate its monetary policy path by relying on inferior data. 

Federal Reserve Vice Chair Philip Jefferson said Friday that the path forward for monetary policy warrants a cautious approach as the central bank’s stance moves toward a more neutral level.

Speaking at an event hosted by the German central bank, Jefferson said he supported the 25-basis-point rate cut in October to tamp down emerging risks to employment. However, he added that it now makes sense to “proceed slowly.”

“The current policy stance is still somewhat restrictive, but we have moved it closer to its neutral level that neither restricts nor stimulates the economy,” said Jefferson. “Given this, it makes sense to proceed slowly as we approach the neutral rate.

“I will continue to determine policy based on the incoming data, the evolving outlook, and the balance of risks,” he added. “I always take a meeting-by-meeting approach. This approach is especially prudent because it is unclear how much official data we will have before our December meeting.”

His remarks, viewed as relatively neutral, add to the chorus of Federal Open Market Committee voting members who have spoken this week about whether the Fed should cut short-term interest rates again at its December meeting.

On Monday, Fed Gov. Lisa Cook took a more hawkish stance on future rate cuts, while Fed Gov. Michael Barr noted Thursday the central bank has “some work to do” in terms of inflation.

As of Friday, the CME FedWatch Tool showed markets pricing a 70.4% chance of another 25-basis-point cut in December, up from 67.5% on Monday. Analysts said upcoming labor market data from the Bureau of Labor Statistics will likely have the final say on whether the Fed’s rate-setting committee continues to move monetary policy toward a more neutral level.Jefferson in his speech Friday also commented on how artificial intelligence is changing the labor market and said the technology’s impact will be felt on both sides of the Fed’s dual mandate.

“When I think about this technology, I consider how it will affect both sides of the Fed’s dual mandate of promoting maximum employment and stable prices,” he said. “As such, it is something that economists and policymakers must monitor.”

He warned there is “real risk” that AI will cause disruptions in the labor force, creating economic slack “at least until it creates new jobs.”

“This potential disruption of labor is a real risk,” Jefferson said. “By automating certain tasks, it could lead to a reduction in some types of jobs. But increased productivity leads to economic growth, which may create new employment opportunities.”

On inflation, Jefferson said AI could help stimulate growth through increased productivity, which would lower production costs and put downward pressure on prices. But he also noted potential upward pressure on inflation, including higher wages for workers “that complement AI” and the demand for data centers that compete for land, energy and other inputs.

“So, what do these still-developing labor and price effects mean for monetary policy?,” said Jefferson. “The short answer is that it is likely still too soon to tell.”