Fed vice chair focused on ‘hard data’ amid uncertainty

The Federal Reserve’s second-in-command is looking for solid evidence of the impact of tariffs before throwing his support behind changing interest rates.

In a Wednesday morning speech, Fed Vice Chair Philip Jefferson said the central bank’s current monetary policy stance gives it the flexibility needed to respond to either a resurgence in inflation or a sharp dropoff in economic activity. But until either outcome manifests, he’s happy to stand pat.

“With respect to the path of the policy rate going forward, I will carefully assess incoming data, the evolving outlook, and the balance of risks,” Jefferson said. “Various measures of consumer and business sentiment have declined sharply this year, and I will be watching very carefully for signs of weakening economic activity in hard data.”

With his comments, delivered at the Federal Reserve Bank of New York’s Annual Conference of Second District Directors and Advisors, Jefferson became the latest Fed official to endorse a wait-and-see approach to policy. Fed Chair Jerome Powell endorsed this approach after last week’s Federal Open Market Committee meeting.

Jefferson added that economic data from recent weeks has not given a clear signal about where things are heading. He pointed to the most reading on gross domestic product, which showed a 0.3% contraction during the first quarter, as being particularly misleading.

“That change, however, overstates the deceleration in activity,” he said. “A surge in imports apparently ahead of anticipated changes to trade policy did not seem to be reflected fully in inventory or spending data.”

Similar nuances in recent inflation readings also make it hard to decipher the degree to which trade restrictions are impacting the real economy. While overall inflation readings have continued toward the Fed’s 2% target, specific price categories have trended in different directions, Jefferson said, noting that while housing services have been coming down steadily, recent months have shown a slight uptick in core goods inflation.

“If the increases in tariffs announced so far are sustained, they are likely to interrupt progress on disinflation and generate at least a temporary rise in inflation,” he said. “Whether tariffs create persistent upward pressure on inflation will depend on how trade policy is implemented, the pass-through to consumer prices, the reaction of supply chains, and the performance of the economy.”

The most recent Consumer Price Index report showed annualized inflation continued to fall in April, coming in at 2.3% for headline inflation, down from 2.4% in March, indicating that the sweeping tariffs implemented on April 2 did not lead to an immediate jump in prices. Core CPI, which factors out food and energy prices, was 2.8% last month.

While the Fed awaits a clearer indication of where the economy is headed, Jefferson said it has one key metric in its favor: consumer expectations. Despite an uptick in near-term inflation expectations in various measures, he said longer-term expectations have remained anchored to the Fed’s 2% target.

“Short-term inflation expectations have increased in both survey- and market-based measures, but I think it is notable that most measures of longer-run inflation expectations have been largely stable, suggesting that the American people understand the Federal Reserve’s commitment to return inflation to our 2% target,” he said.