The Federal Reserve's second-in-command is looking for solid evidence of the impact of tariffs before throwing his support behind changing interest rates.
In a Wednesday morning speech, Fed Vice Chair Philip Jefferson said the central bank's current monetary policy stance gives it the flexibility needed to respond to either a resurgence in inflation or a sharp drop-off in economic activity. But until either outcome manifests, he's happy to stand pat.
"With respect to the path of the policy rate going forward, I will carefully assess incoming data, the evolving outlook and the balance of risks," Jefferson said. "Various measures of consumer and business sentiment have declined sharply this year, and I will be watching very carefully for signs of weakening economic activity in hard data."
With his comments, delivered at the Federal Reserve Bank of New York's Annual Conference of Second District Directors and Advisors, Jefferson became the latest Fed official to endorse a wait-and-see approach to policy. Fed Chair Jerome Powell endorsed this approach after last week's
Jefferson added that economic data from recent weeks has not given a clear signal about where things are heading. He pointed to the most recent reading on gross domestic product, which showed a 0.3% contraction during the first quarter, as being particularly misleading.
"That change, however, overstates the deceleration in activity," he said. "A surge in imports apparently ahead of anticipated changes to trade policy did not seem to be reflected fully in inventory or spending data."
Similar nuances in recent inflation readings also make it hard to decipher the degree to which
"If the increases in tariffs announced so far are sustained, they are likely to interrupt progress on disinflation and generate at least a temporary rise in inflation," he said. "Whether tariffs create persistent upward pressure on inflation will depend on how trade policy is implemented, the pass-through to consumer prices, the reaction of supply chains, and the performance of the economy."
The
While the Fed awaits a clearer indication of where the economy is headed, Jefferson said it has one key metric in its favor: consumer expectations. Despite an uptick in near-term inflation expectations in various measures, he said longer-term expectations have remained anchored to the Fed's 2% target.
"Short-term inflation expectations have increased in both survey- and market-based measures, but I think it is notable that most measures of longer-run inflation expectations have been largely stable, suggesting that the American people understand the Federal Reserve's commitment to return inflation to our 2% target," he said.
