Fed Vice Chairman Jefferson: A slow approach to austerity makes sense as the policy rate approaches neutral

The Federal Reserve should “move slowly” in approving further interest rate cuts as monetary policy moves closer to a neutral stance, Fed Vice Chairman Philip Jefferson said Friday.After a quarter-point rate cut last week, which Jefferson supported, he said “the current policy stance is still somewhat restrictive” and serves to reduce inflation, which available information suggests has not changed much since last year and remains above the U.S. central bank’s 2% target.

But the policy rate, currently between 3.75% and 4%, is now “closer to the neutral level that neither constrains nor stimulates the economy,” Jefferson said in remarks prepared for Germany’s Bundesbank. “Given this fact, it makes sense to proceed slowly as we approach neutral interest rates.”He said he would make decisions on rate cuts “meeting by meeting,” an approach he described as “particularly cautious because it is unclear how much official data we will have before our meeting in December” given the ongoing federal government shutdown. Responding to questions after delivering his prepared remarks, Jefferson said he believed the data available to the Fed, including studies conducted by the Fed itself, reports from state governments and data from private companies, was sufficient for central bank officials to make decisions.

“We’re not getting the flood of official data that we normally would have,” Jefferson said on the day the government would have released October payroll data but did not, as the second monthly jobs report was put on hold by the federal shutdown. Still, “we have enough data… so we can continue to do our work.”

The Fed meets on December 9 and 10, with investors expecting another quarter-point rate cut. However, at a press conference after last week’s Fed meeting, Fed Chairman Jerome Powell said a cut in December was “not a foregone conclusion, far from it.” Powell’s comments reflected divided opinions among policymakers on whether a weakening labor market or persistently above-target inflation pose a greater risk to the U.S. economy at this time. The rate cut was approved with dissent in favor of both tighter and looser monetary policy, an unusual outcome in a consensus-based organization. usual set of economic data at hand.

But he said the information available to the Fed shows that “the overall economic picture in the US has not changed much in recent months,” with the labor market “gradually cooling” and inflation “running at a pace similar to a year ago.”

Most of Jefferson’s comments focused on the implications of artificial intelligence for the economy, and especially on the Fed’s two goals: stable prices and maximum employment.

He said the new technology could disrupt traditional employment patterns, a process that may already be underway, and lead to weaker inflation as productivity rises.

But with adoption still in its early stages, “the short answer is it’s probably too early to tell.”