Fed's No. 2 Sets the Tone: Inflation Is the "Most Important Signal," Rate Decisions Hinge on It

Federal Reserve Vice Chair Philip Jefferson said inflation has become the most important gauge as policymakers weigh whether to raise interest rates further. Jefferson said recent economic activity and labor market performance have been solid, but price pressures persist; October inflation data showed inflation remains significantly above target. "Therefore, I believe the trajectory of inflation is the most important signal for judging the appropriate stance of monetary policy," Jefferson said in prepared remarks in San Diego. He added that policymakers need to keep tracking the latest data to assess "whether to adjust policy further." Multiple Fed officials spoke intensively this week, and Jefferson's remarks capped the week's official commentary. Officials expressed strong concerns about price pressures, further cementing market expectations for a December rate hike. Many officials, compared with their previous statements, favor moving faster on policy tightening. Fed Governor Waller warned that a 50-basis-point rate hike may be necessary next month. However, some officials, such as Philadelphia Fed President Anna Paulson, still advocate a gradual pace of rate hikes. Federal funds rate futures pricing shows investors are currently betting on rate hikes in December and January next year, with another increase in March or April next year. In this speech focused on technology and productivity, Jefferson said new technologies could hit the labor market, with workers facing unemployment before they can complete skills retraining. This requires policymakers to judge what proportion of the rise in unemployment is due to structural factorsa long-term mismatch between workers' skills and companies' hiring needs that persists even when economic growth is strong. Jefferson warned: "Monetary policy can adjust cyclical economic conditions, such as temporary weakness in employment and consumption, but it cannot solve structural problems that determine the long-term level of employment." He also mentioned that the current technology boom could push up the neutral ratethe interest rate level that neither restrains nor stimulates the economy. Faster productivity growth would stimulate consumer spending and strong investment in AI infrastructure, which could ultimately push up the neutral rate. However, the Fed official acknowledged that it is difficult for policymakers to pinpoint the level of the neutral rate. "The relationship between productivity growth and real interest rates has historically been highly volatile, so anticipating changes in the neutral rate is not easy," Jefferson said.