Federal Reserve Governor Philip Jefferson said on Friday that inflation remained too high and that there had been “little progress” in reducing the central bank’s 2 percent target. This is a bearish view as a report earlier this week indicated that price increases could be slowing.
Jefferson, who was nominated by the President Joe Biden Appointed vice chairman of the Fed earlier on Friday, he also said in a speech at the Hoover Institution in California that the turmoil in the US financial system following the collapse of three major banks is expected to have only a limited impact on the economy.
Jefferson’s potential rise to number two on the Fed’s seven-member board would give him greater leverage over interest rate policy and make him a close colleague of the chairman Jerome Powell.
While year-on-year inflation fell about 2.75 percentage points to 4.2% in March from its peak in June, Jefferson said “almost all” of the decline was due to falling energy and food prices.
“The bad news is that there has been little progress on core inflation,” he said. Core prices exclude the volatile food and energy categories and are considered a better measure of underlying inflation.
Jefferson also cited a closely watched metric often cited by Powell that captures the prices of services, from medical care to dining out, excluding energy and housing costs. That measure “hasn’t shown major signs of slowing down,” Jefferson said.
Following the Fed’s last monetary policy meeting last week, the central bank suggested in a statement that it could suspend rate hikes at its next meeting in June after raising interest rates ten times in a row. The increases are intended to curb spending, growth and inflation.
Jefferson did not indicate in his remarks whether he would support such a pause.
Many Fed officials are closely watching the fallout from the collapse of three major banks over the past two months. A recent Fed report showed that the banks have been reducing their lending for months and that this tightening has accelerated slightly in the wake of the bank failures.
If banks become more reluctant to lend, it could slow the economy and reduce the need for the Fed to raise interest rates.
Jefferson said he expected the bank failures to have little impact and said they were likely to have “a slight dampening effect” on the economy, adding that it was “too early to say”.
His comments followed a report on Wednesday that showed inflation fell slightly in April but remained elevated. Year-on-year, consumer prices rose 4.9%, compared with a 5% annual increase in the previous month — the lowest year-on-year increase in two years. But that index — the CPI — has fallen further than the Fed’s preferred measure, which is updated on May 26.
Speaking in Europe earlier Friday, one of Jefferson’s Fed colleagues, Michelle Bowman, also expressed disappointment at progress so far in containing inflation. She hinted that she could support another rate hike at the June meeting.
“If inflation remains high and the labor market remains tight, further rate hikes would be ‘probably appropriate’ to bring inflation down,” Bowman said.
So far, the latest inflation and employment reports have “provided no consistent evidence that inflation is on a downtrend”.
Federal Reserve Bank of Richmond President Tom Barkin also expressed his disappointment at persistently high inflation in an interview with The Associated Press on Wednesday.
Core inflation has been stuck in a range of 0.3 to 0.5 percent for months, Barkin said, “where one would have liked to see a move down and in line with our target.”