Fed Vice Chair Sets the Tone: Inflation Is the "Most Important Signal," Interest Rate Decisions Depend on It

According to Zhihong Finance APP, Federal Reserve Vice Chair Philip Jefferson stated that when policymakers consider whether to further raise interest rates, inflation has become the most important metric.

Jefferson said that recent economic activity and the labor market have performed robustly, but price pressures persist; October inflation data show that inflation levels remain significantly above target.

"Therefore, I believe that the inflation trend is the most important signal for assessing the appropriate stance of monetary policy," Jefferson said in his prepared remarks in San Diego. He added that policymakers need to continuously monitor the latest data in order to assess "whether further policy adjustments are needed."

This week, several Federal Reserve officials have spoken out intensively, and Jefferson's remarks mark the conclusion of official comments for the week. Many officials expressed strong concerns about price pressures, further solidifying market expectations for a rate hike in December.

Compared to previous statements, many officials now lean toward tightening policy more quickly. Federal Reserve Governor Waller has warned that it may be necessary to raise rates by 50 basis points next month. However, some officials, such as Philadelphia Fed President Anna Paulson, continue to advocate for a gradual pace of rate increases.

Federal funds rate futures pricing shows that investors are currently betting on rate hikes in December and January next year, with another possible increase in March or April next year.

In his speech focusing on technology and productivity, Jefferson pointed out that new technologies may impact the labor market, with workers facing unemployment before they have time to reskill. This requires policymakers to determine how much of the rise in unemployment is due to structural factors—even with strong economic growth, there can still be a long-term mismatch between workers' skills and employers' needs.

Jefferson warned: "Monetary policy can regulate cyclical economic conditions, such as temporary weaknesses in employment and consumption, but it cannot solve structural issues that determine long-term employment levels."

He also mentioned that the current wave of technological boom may push up the neutral rate of interest—the rate that neither restrains nor stimulates the economy. Accelerated productivity growth would boost consumer spending and strong investment in AI infrastructure, which could ultimately raise the neutral rate.

However, this Federal Reserve official admitted that it is difficult for policymakers to accurately determine the level of the neutral rate.

"The relationship between productivity growth and the real interest rate has always been highly volatile, so it is not easy to predict changes in the neutral rate," Jefferson said.