Vice Chair Jefferson's Economic Outlook and Monetary Policy Speech
Greetings, esteemed President Schmid and all present. It's an honor to be here in Kansas City, a city rich in history and economic significance. I'm grateful for the opportunity to engage with such a dynamic community and share insights on the economy, especially as a Federal Reserve official.
The Kansas City region, nestled between the Kansas and Missouri rivers, has long been a hub of innovation and collaboration. From the Pony Express to the greeting card capital, and soon the World Cup, this area has a unique story to tell. Today, I aim to contribute to that narrative by offering my perspective on the economy and monetary policy.
Economic Outlook
In shaping my economic outlook, I rely on a diverse range of data sources, including government, administrative, and private-sector data. This comprehensive approach is crucial, especially given the recent federal government shutdown, which has delayed key economic indicators. While federal data is invaluable, we must also consider alternative sources, such as regional meetings and industry insights.
Before the shutdown, the U.S. economy was on a moderate growth trajectory. However, the shutdown has likely disrupted economic activity in the current quarter, affecting federal workers and government spending. These effects are expected to be temporary and will likely reverse in the coming months.
On a broader scale, the balance of risks in the economy has shifted. Recent months have seen increased downside risks to employment, while upside risks to inflation have likely diminished. This shift highlights the need for a cautious approach to monetary policy.
Labor Market
The labor market is experiencing a gradual cooling. Unemployment insurance claims have stabilized, and anecdotal reports indicate a mixed outlook. Some firms are slowing hiring or making cuts, while others are ready to resume delayed hiring and investment.
I anticipate a slight increase in the unemployment rate by year-end, starting from the low 4.3% recorded in August. Despite this, I maintain a cautious view on employment prospects, with potential risks skewed to the downside.
Inflation
Inflation is currently running at a rate similar to that of a year ago, slightly below 3%. This stagnation is primarily due to tariff effects, with signs that inflation excluding tariffs is making progress toward the 2% target. Some firms anticipate a surge in pricing pressure from tariffs in the fourth quarter as non-tariffed merchandise inventory diminishes.
A reasonable assumption is that tariffs will result in a one-time shift in the price level, not a persistent inflation issue. This view is supported by inflation expectations, which have stabilized after a spring rise, and market-based long-term expectations remain well-anchored.
Several factors will influence the magnitude and persistence of inflation. These include final tariff rates, the extent and timing of pass-through to consumer prices, supply chain reactions, and overall economic conditions. I will closely monitor these factors and remain committed to achieving the 2% inflation target.
Monetary Policy
Given the economic outlook, I supported the decision to reduce the policy rate by 25 basis points last month. This adjustment was appropriate due to the increased downside risks to employment. The current policy stance remains somewhat restrictive, but it is being gradually moved closer to the neutral level, which neither restricts nor stimulates the economy.
At our recent Federal Open Market Committee meeting, I also supported the decision to conclude the reduction of aggregate securities holdings by December 1. Over the past year, we have reduced securities holdings by approximately $2.2 trillion. The Committee's plan was to stop the runoff when reserves were at a level consistent with ample reserve conditions.
Starting in December, we intend to maintain the balance sheet size for a period as reserve balances continue to decline passively, while other non-reserve liabilities, such as currency, rise. We will continue to allow agency securities to run off and reinvest the proceeds in Treasury bills, further aligning our portfolio with Treasury securities.
As we approach our next meeting, the availability of official data remains uncertain. I will continue to determine policy based on incoming data, the evolving outlook, and the balance of risks, taking a meeting-by-meeting approach, which is particularly prudent at this juncture.
Thank you once again to the Kansas City Fed for hosting this event. I look forward to our insightful discussions and the opportunity to engage with this vibrant community.
