Federal Reserve vice chair Philip Jefferson said Thursday that he is still eyeing rate cuts “later this year” despite new readings on inflation that were hotter than expected.
“If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back our policy restraint later this year,” Jefferson said in a speech at the Peterson Institute for International Economics in Washington.
Jefferson said he expects consumer spending to slow, but there is a risk that it could be even more resilient, which could cause progress on inflation to stall.
Absent any shocks to the economy, the Fed could opt to hold rates longer than expected at current levels or ease sooner depending on how inflation evolves, he added.
Jefferson becomes the latest Fed official to caution that rate cuts won’t likely happen until “later this year” — a phrase also used recently by Boston Fed President Susan Collins and Cleveland Fed President Loretta Mester.
Atlanta Fed President Raphael Bostic pegged the timetable as “summer time,” in the third quarter of the year.
The Fed’s Federal Open Market Committee decided to hold the benchmark interest rate steady at its last meeting in January, keeping it at its highest level since 2001 after an aggressive campaign to cool inflation.
Minutes from that January policy meeting showed most officials “noted the risks of moving too quickly to ease the stance of policy and emphasized the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably to 2 percent.”
Markets are adjusting to the cautious commentary from Fed officials, now predicting a first rate cut starting in June as opposed to March.
A series of new readings on inflation and the US economy that were hotter than expected are reinforcing the Fed’s cautious stance.
The latest signal came Friday when the Labor Department said its Producer Price Index — which tracks the prices businesses pay to manufacture products and services — exceeded forecasts from December to January.
The Consumer Price Index in January also was also hotter than economists expected.
The disappointing CPI reading last week doesn’t appear to be throwing Jefferson’s outlook off course. The Fed official said it highlights that bringing inflation down is likely to be a “bumpy” process.
“My colleagues on the FOMC and I believe that our policy rate is likely at its peak for this tightening cycle,” he added.
In comparing the current monetary cycle with past cycles, he noted that in five out of six episodes, the peak rate is reached once inflation is contained, albeit in some cases with risks still present.
Jefferson said he expects inflation for core services, which hasn’t slowed much, will moderate as the job market cools.
Other risks Jefferson flagged had to with employment weakening as the economy slows or whether a conflict in the Middle East could lead to higher commodity prices.
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