Fed's Jefferson: Interest rates close to neutral level, future policy actions should be more cautious

Federal Reserve Vice Chairman Philip Jefferson said that, considering interest rates have fallen to a level closer to neutrality (neither restricting nor stimulating the economy), the Federal Reserve should be more cautious in future policy actions. Jefferson pointed out that current interest rates still have a "slightly restrictive" impact on the economy, but also added, "As we approach neutral interest rates, it is wise to slow down action." Jefferson expressed his support for the decision by Fed officials last week to cut rates by 25 basis points, citing the increased risk of further cooling in the labor market. He said, "This move is appropriate because I have observed a shift in the balance of risks over the past few months, with increased downside risks to employment." However, he did not state whether he supports another rate cut at the next December meeting. Despite facing a situation where official statistics have been almost halted due to the federal government shutdown, Jefferson pointed out that current data indicates that the overall economic situation in the US has not changed significantly in recent months. He described the current economy as experiencing "moderate growth" with the labor market "gradually cooling." He specifically mentioned that the inflation rate has remained relatively stable over the past year, largely due to the impact of tariffs imposed by US President Trump. He also stated that there are signs that core inflation may be steadily moving towards the Fed's 2% target. It is worth noting that Jefferson spent a considerable portion of his speech discussing the rise of artificial intelligence (AI). He said that it is still too early to judge the impact of AI on the labor market, prices, and the implications for monetary policy. He stated, "Recent patterns in hiring, productivity growth, and inflation changes may reflect structural shifts driven by AI, but the extent of its impact is still uncertain." Multiple Fed officials speak out Since the Fed announced its rate decision last week, several Fed officials have made statements, but there are differing views among them on the Fed's monetary policy outlook. San Francisco Fed President Daly stated earlier this week that she supported the 25 basis point rate cut implemented by the Fed last week, and believed it would be appropriate to "slightly lower policy rates again" given that inflation is still above the 2% target and the labor market is cooling. Fed's third in command, New York Fed President Williams, also takes a relatively dovish stance, suggesting that market estimates of the "neutral rate" might be too high. If this is the case, there is still room for further rate cuts without weakening efforts to suppress inflation. St. Louis Fed President Bullard believes that the Fed's monetary easing measures in the past year were implemented "to provide protection for the labor market," and he expects there is still room for a policy adjustment of 50 to 75 basis points. Fed Governor Mollins, appointed by President Trump, called for more aggressive rate cuts, stating that credit pressures indicate current policy is too restrictive, and he will continue to advocate for an unusually large cut in rates. Meanwhile, Chicago Fed President George released a more hawkish signal. He stated on Monday that he has not yet decided whether to support a rate cut in December and said that currently his threshold for a rate cut is "higher than in the previous two meetings." George noted that inflation has been above target for four and a half years and the trend is still not ideal, which makes him cautious about further easing policy. While acknowledging a slight cooling in the labor market, he still believes that most indicators show stable labor demand. He specifically warned that in the context of the government shutdown, incomplete data, and uncertain inflation trends, hasty rate cuts may lead to "policy mistakes of preemptive nature," emphasizing that rates should decline along with inflation rather than decrease prematurely. Cleveland Fed President Harker stated on Thursday that current inflation is still "too high" and that the risks to the economy are greater than the cooling labor market. He emphasized that monetary policy should continue to put pressure on inflation and noted that current interest rates are "almost non-restrictive," hinting that further rate cuts may be premature. Harker expects that US inflation will not reach the Fed's 2% target until at least 2026 or one to two years later, meaning that the Fed has not been able to achieve price stability for nearly a decade.