Fed’s Jefferson warns of downside risks to jobs as inflation progress stalls

Investing.com -- Federal Reserve Vice Chair Philip N. Jefferson said Monday that the balance of risks in the U.S. economy has shifted, with growing downside risks to employment even as progress on inflation has stalled.

Speaking at an event hosted by the Federal Reserve Bank of Kansas City, Jefferson said the economy had been on a “moderate growth” path before the recent government shutdown, but the labor market now appears to be cooling “gradually” on both the demand and supply sides.

Jefferson said he expects the unemployment rate to “inch up slightly” by year-end from August’s 4.3% reading, adding that the risks to the jobs outlook are now “skewed to the downside.”

On inflation, Jefferson acknowledged that the Fed’s progress toward its 2% target has essentially paused, with price growth “similar to where it was a year ago,” slightly below 3%. He attributed the stall largely to tariff effects, arguing that inflation excluding those impacts may still be drifting lower.

“A reasonable base case is that tariffs result in a one-time shift in the price level, not an ongoing inflation problem,” he said, noting that inflation expectations have pulled back from their spring increase.

Jefferson backed the Fed’s latest 25-basis-point rate cut, describing policy as “still somewhat restrictive” but moving closer to a neutral setting. Given the shifting risk balance, he reiterated that the central bank should “proceed slowly” as it approaches neutral.

Jefferson also confirmed that the Fed will end the runoff of its securities holdings on Dec. 1, after shrinking the balance sheet by roughly $2.2 trillion since June 2022. Starting next month, the Fed will keep the overall size of its holdings steady, allowing agency securities to run off and reinvesting those proceeds into Treasury bills.

He closed by stressing that the policy path will depend on incoming data and an evolving risk outlook, emphasizing a “meeting-by-meeting approach” that he called “especially prudent at this time.”