Federal Reserve Vice Chair Philip Jefferson said Tuesday that the jolt in energy prices complicates his inflation outlook, and depending on how long the Middle East conflict lasts, elevated oil prices could weigh on consumer and business spending.
“It is difficult to say how long the conflict in the Middle East and related disruptions could last,” Jefferson said in a speech in Detroit. “I am highly attentive to the fact that inflation has remained above the Fed’s 2 percent target for five years … That is why I am committed to returning inflation to our target.”
He underscored that progress in bringing down inflation — specifically core inflation — had already stalled over the past year, mainly due to tariffs.
His expectation has been that inflation would resume falling once higher tariffs are no longer pushing up consumer prices. Jefferson also pointed to deregulation by the administration, along with high productivity growth, which could act to push down inflation. But he noted that the spike in energy prices will push up headline inflation at least in the near term. He said ongoing trade policy uncertainty and geopolitical tensions pose upside risk to his inflation forecast.
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Jefferson said he expects higher energy prices to be reflected in upcoming inflation readings. He expects the Fed’s preferred inflation gauge — the Personal Consumption Expenditures index — due out Thursday, will show inflation rose 2.8% in February before the war broke out. On a “core” basis, excluding volatile food and energy prices, he expects inflation to clock in at 3%.
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He said that the current interest rate range of 3.5% to 3.75% should allow inflation to drop once businesses have finished passing on tariff costs, while also continuing to support the job market.
“I believe that the current stance allows us to determine the extent and timing of additional adjustments to our policy rate based on the incoming data, the evolving outlook, and the balance of risks,” Jefferson said.
While Jefferson said the job market appears to be stabilizing, he remains cautious, noting that a “sufficiently large negative economic shock” could push job gains down and drive up the unemployment rate. He also noted that if heightened uncertainty continues, there’s a risk companies will remain reluctant to hire, which could hold down job growth longer. At this point, he expects the unemployment rate to remain roughly steady this year.