Federal Reserve Vice Chair Philip Jefferson said inflation has become the most important reference indicator as policymakers weigh whether to raise interest rates further.
Jefferson noted that recent economic activity and labor market conditions have been solid, with price pressures persisting, and that October's price data showed inflation running well above target. "Accordingly, I view the course of inflation as the core signal for judging the appropriate stance of monetary policy," Jefferson said in the text of a speech delivered in San Diego. He added that policymakers should continue to track the latest data and assess whether "further adjustments to policy" are needed.
This week, several Fed officials spoke in succession, expressing strong concern about price pressures and reinforcing market expectations for a December rate hike, with Jefferson the last official to comment this week. Multiple officials advocated accelerating the pace of policy adjustment, and Fed Governor Christopher Waller even warned that a 50 basis point hike may be needed next month. But some officials, such as Philadelphia Fed President Anna Paulson, still support gradual rate increases. Federal funds rate futures pricing shows investors expect hikes in December and January, with another increase in March or April.
Jefferson's speech focused on technology and productivity. He mentioned that new technologies carry the risk of disrupting the labor market: workers may face unemployment before they can receive retraining. This requires policymakers to determine how much of the rise in unemployment is structural—even with strong economic growth, workers' skills and job demands can remain mismatched over the long term. "Monetary policy can influence cyclical conditions, such as short-term declines in employment and consumption, but it cannot resolve the structural problems that determine the long-term level of employment," Jefferson warned.
He also suggested that a technology boom could push up the neutral rate—the rate level that neither restrains nor stimulates the economy. Higher productivity would drive consumption as well as large-scale investment in AI, ultimately raising the neutral rate. However, the Fed official said it is very difficult for policymakers to precisely judge where the neutral rate stands. "The historical relationship between productivity growth and real interest rates is already highly volatile, so predicting changes in the neutral rate is very difficult," Jefferson said.
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