Fed’s Jefferson says he is ‘cautiously optimistic’ about inflation

By Howard Schneider

WASHINGTON (Reuters) – Federal Reserve Vice Chair Philip Jefferson said on Thursday he remained “cautiously optimistic” about the U.S. central bank’s progress in bringing inflation back down to the 2% target, but gave no direct steer on when interest rate cuts may begin.

In comments prepared for delivery to the Peterson Institute for International Economics, Jefferson said that Fed staff estimates show the central bank’s preferred measure of inflation, the personal consumption expenditures price index, rose 2.4% over the 12 months through January, with prices stripped of volatile food and energy costs increasing 2.8%.

The actual data will be released next week, but Jefferson said the staff estimates indicate that a “pronounced” drop in inflation continues and should let the Fed reduce interest rates later this year.

“I remain cautiously optimistic about our progress on inflation,” Jefferson said. “If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back our policy restraint later this year.”

The Fed held its benchmark overnight interest rate steady in the 5.25%-5.50% range at its policy meeting last month, and minutes of that session showed broad consensus that more evidence of falling inflation is needed before it can be lowered.

Jefferson, still early in his tenure as the Fed’s top policy spokesperson, cited among the risks to his outlook the possibility that strong consumer spending “could cause inflation to stall,” weakening job growth might warrant earlier rate cuts, or outside shocks might push up prices.

He did not, however, lean into any of those risks as his base case, or indicate when he thinks the Fed might find the confidence it needs to begin cutting rates.

Jefferson instead devoted much of his talk to reviews of past monetary easing cycles, including a mid-1990s episode when the Fed cut rates in response to easing inflation – rather than an economic weakening – that might be the best parallel to the current situation.

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