Federal Reserve Vice Chairman Jefferson: Uncertainty in the Middle East conflict is intensifying in the short term, and current interest rates are at an appropriate level.

Federal Reserve Vice Chairman Jefferson stated that the situation in the Middle East will increase uncertainty and raise inflation in the short term, but the current policy stance of the Federal Reserve is still appropriate. Jefferson described the current interest rates as being in a range that will neither stimulate nor suppress the economy, and stated that the current policy stance will support employment, while inflation is expected to fall back to the target level of 2% as the impact of tariffs diminishes. In his prepared remarks for a speech at Detroit University on Tuesday, Jefferson said, "I continue to be cautious about my outlook. Economic uncertainty remains high, with rising energy prices and further escalation of conflicts in the Middle East exacerbating this uncertainty. However, I still believe that the current policy stance is appropriate, allowing us to assess how the economy evolves." Although Jefferson expressed his expectation that the overall inflation downtrend will continue, he expressed caution about how the war in the Middle East will impact inflation and consumer demand, stating that this conflict has made his judgment on price trends more complex. He stated, "Recent increases in energy prices will exert some upward pressure on overall inflation in the short term. Ongoing trade policy uncertainty and geopolitical tensions pose upward risks to my inflation forecasts." As the Middle East war drives up energy costs and threatens the supply of other key commodities, Federal Reserve officials have expressed growing concerns about the outlook for the U.S. economy. At the policy meeting on March 17-18, the Federal Reserve kept interest rates unchanged and warned that uncertainty from the war remains high. Currently, the Federal Reserve is trying to strike a balance between inflation and the labor market - inflation in January was about 1 percentage point higher than its 2% target, and further increases are expected due to rising oil prices. Meanwhile, while the labor market shows signs of stabilization, job growth has been limited in the past year. Businesses have also begun to warn of the impact of the war. The U.S. services sector slowed down its expansion in March, with employment seeing the largest decline since 2023. Input costs have accelerated significantly, with several corporate executives stating that the conflict has brought about a new round of economic uncertainty. Jefferson also sent a cautious signal regarding the labor market. He stated that the labor market is generally balanced, but is susceptible to the impact of the latest uncertainty. He said, "If the current high level of uncertainty continues to exist, companies may continue to be reluctant to hire, thus delaying job growth for a longer time. I will continue to monitor the pace of job growth in the future to evaluate the extent of potential vulnerabilities in the labor market." Furthermore, during the Q&A session following his speech, Jefferson acknowledged the potential risks in the area of non-bank lending from private credit. This area has seen rapid growth in recent years, but with several high-profile default events in recent times, there has been an increase in investor redemptions. He stated, "Private credit has not yet experienced what we call a complete credit cycle, which means that some arrangements in this area of our financial system have not been tested during an economic downturn." He added, "We will continue to closely monitor this area to ensure that its impact does not pose a more widespread threat to financial stability." Jefferson's views are in line with those of the Federal Reserve's "big three" - New York Fed President Williams. Williams stated that he expects the rise in energy costs caused by the war in the Middle East to push up overall inflation, but that the "fundamentals underlying core inflation have not significantly changed," and added that he expects the core inflation rate excluding food and energy to only rise by 0.1 to 0.2 percentage points. He emphasized that there is currently no need to consider adjusting benchmark interest rates, and said that the "current monetary policy stance is very appropriate," sufficient to observe the economic consequences of the Middle East conflict, "monetary policy is in the desired position, and we can respond at any time if the situation changes." St. Louis Fed President Moselem also stated earlier this month that the current level of interest rates is still suitable for addressing economic risks, with no need to adjust the policy stance in the short term. In a speech in Washington, Moselem pointed out that the Federal Reserve's policy is in a "good position" to address both employment and inflation targets simultaneously. He expects the current range of interest rates to remain unchanged for a period of time. However, he also stressed that the economic outlook remains highly uncertain. While the baseline scenario calls for moderate economic growth, stable unemployment rates, and gradual inflation decline, uncertainty from the Middle East conflict and trade policy may weigh on consumer and business spending in the first half of this year. In terms of inflation, Moselem warned that the rise in prices of energy, aluminum, and fertilizer is putting new pressure on inflation. In this environment, risks to both employment and inflation are showing unfavorable tendencies, with the labor market potentially weakening and inflation possibly persisting above the target level for a longer period of time. Federal Reserve Governor Barr also supports a "wait-and-see" approach in the short term. He stated at the end of March that policymakers are fully capable of keeping interest rates unchanged, although factors such as the Middle East conflict have made it complicated for the Federal Reserve to push inflation back to the 2% target. He also emphasized that the impact of tariffs on inflation may persist beyond this year, while pointing out that non-housing services inflation and core inflation excluding volatile food and energy categories are both at high levels. Barr said, "Given the considerable uncertainty over the potential impact of the Middle East situation on the U.S. economy, and other factors I mentioned, taking some time to assess the situation is reasonable. Our current policy stance puts us in a favorable position to evaluate data, changing forecasts, and risk balances while maintaining stability." However, some Federal Reserve officials have shown a more hawkish stance. Cleveland Fed President Hammock and Chicago Fed President Gulsby both believe that the issue of inflation is far more serious than the issue of employment. This highlights their inclination to support a tighter rather than looser monetary policy amid rising energy prices from the Middle East conflict while the labor market remains sluggish. Federal Reserve Governor Cook stated that the current Middle East conflict has shifted the balance of risks, making inflation a greater concern for policymakers than employment. Cook said, "I think, due to the impact of the war, inflation risks are now higher. As for the labor market, I believe it is in balance, but this balance is very fragile." "We may maintain the current status for a much longer period than expected. Therefore, I think the current risk balance has shifted more toward inflation."