FX.co ★ Inflation uncertainty may require stronger response, Fed's Jefferson says

According to Federal Reserve Vice Chair Philip Jefferson, central bank governors may need to adopt more forceful measures than usual to keep inflation expectations anchored as it is not clear how long high inflation might persist. "The uncertainty around inflation persistence may warrant stronger policy response than otherwise," he said.

Notably, the Fed member left no comments on his economic outlook. Moreover, he did not specify his preference for the Federal Reserve's further monetary policy trajectory. At the same time, Jefferson highlighted uncertainty over economic and inflation prospects.

Jefferson noted that policymakers should take uncertainty into account when making policy decisions. In addressing the issue, the expert referred to the economic literature laying out two different approaches. One implies gradualism in the face of uncertainty, and the other suggests the introduction of bolder-than-usual monetary measures.

In the view of the Federal Reserve Board's vice chair, both approaches outlined in the literature "tend to lead to policy that is stronger than the certainty equivalent case to forestall the possibility of inflationary forces becoming embedded in inflation expectations."

In its aggressive fight against galloping inflation, the US central bank raised the key interest rate by 5.25 percentage points over a year and a half to the 5.25%-5.50% range reached in July 2023. As a result, inflation cooled significantly after soaring to a 40-year high in the summer of 2022. Nevertheless, the regulator remained vigilant about further inflation dynamics. Thanks to its oversight, consumer price increases slowed to nearly 3.4%.

According to a New York Fed survey, inflation expectations softened in the market. Earlier, Fed Chairman Jerome Powell said that he would not rule out further rate hikes if the move to the 2% inflation target stalled.