Fed’s Jefferson Says Core Inflation Progress ‘Discouraging’

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(Bloomberg) — Federal Reserve Governor Philip Jefferson said progress on inflation this year has been “mixed” with much of the deceleration occurring in food and energy prices and not enough progress in other categories.

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“Outside of used motor vehicle prices, which fell unexpectedly in March, disinflation in core goods prices is occurring at a slower pace than expected,” Jefferson said in prepared remarks at Stanford University’s Hoover Institution in California. “Supply and demand imb alances in the goods sector seems to be resolving less quickly than expected.”

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He called progress on core inflation — the rate of price increases without food and energy — “discouraging.”

His remarks came just hours after President Joe Biden said he would nominate Jefferson to the position of vice chair. Jefferson said he was honored and humbled by the news. He will need to be confirmed by the Senate to be elevated to the Fed’s No. 2 spot.

The US central bank earlier this month indicated that it may be ready to pause its rate-hiking campaign, which last year included four consecutive 75-basis-point increases before a slowdown in the last six months, as it assesses how the policy works it the s way through the economy.

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But policymakers haven’t committed yet to an end-date for the hiking cycle, saying instead they are pivoting to a meeting-by-meeting approach to decision making and weighing all available data as inflation has cooled more slowly than many had expected.

Speaking at the same Stanford event, St. Louis Fed President James Bullard signaled policymakers may be close to finished with rate hikes.

“Monetary policy is now at the low end of what is arguably sufficiently restrictive given current macroeconomic conditions,” he said in a presentation prepared for the Stanford event, but noted that the restrictive zone can move in reaction to incoming data.

He also said it’s encouraging that market-based inflation measures have returned to levels consistent with the Fed’s 2% inflation target.

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“The fiscal stimulus is receding, and monetary policy has been adjusted rapidly in the last year to better align with traditional central bank strategy,” he said. “Accordingly, the prospects for continued disinfection are good but not guaranteed.”

The consumer price index posted its first sub-5% reading in two years last month, a report showed earlier this week. Core prices also cooled, though remain at a higher level.

Jefferson said recent bank stress following the collapse of several mid-size US lenders may lead to tighter credit conditions going forward, which may add to the Fed’s efforts to cool the economy.

“The tightening in financial conditions we have seen in response to our monetary policy actions is likely to be augmented by the effects on credit conditions from recent strains in the banking sector,” Jefferson said.

But credit restrictions may only have a “mild” negative impact on economic growth, as the turmoil was isolated and quickly contained, he said, adding there is still “significant uncertainty” around credit in the coming year.