‘Skipping’ Rate Hike Not a Signal That Tightening Is Over: Fed’s Jefferson

Philip Jefferson, nominated to be a member of the Federal Reserve Board of Governors, at a Senate Banking, Housing, and Urban Affairs Committee confirmation hearing on Capitol Hill in Washington on Feb. 3, 2022. (Ken Cedeno/Reuters)

The Federal Reserve potentially leaving interest rates unchanged at next month’s policy meeting might not indicate that the central bank’s tightening efforts are over, Fed Governor Philip Jefferson said in a speech.

An announcement to keep the benchmark fed funds rate in the target range of 5.00 and 5.25 percent would allow officials to comb through even more data before employing additional tightening measures.

“A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle,” Jefferson said at the Annual International Conference on Policy Challenges for the Financial Sector on May 31. “Indeed, skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming. With that said, let me turn to the topics covered in our two sessions this afternoon.”

While inflation has declined since peaking last summer, Jefferson thinks “core inflation is still too high,” although there has been evidence that it is “decelerating.”

The Fed has been paying close attention to metrics monitoring core inflation, which eliminates the volatile food and energy components.

In April, the annual core consumer price index (CPI) eased to 5.5 percent, down from 5.6 percent in the previous month. However, the core personal consumption expenditures (PCE) price index rose to 4.7 percent year-over-year, up from 4.6 percent in March.

The futures market has been going back and forth on a rate hike or rate pause in recent weeks. As of May 31, investors are penciling in a pause, according to the CME FedWatch Tool.

The Federal Reserve building is seen past caution tape in Washington, D.C., on Sept. 19, 2022. (Stefani Reynolds/AFP via Getty Images)

Jefferson also touched upon the broader economy, noting that a recession is not his baseline forecast. However, he does anticipate a slowing economy for the rest of 2023 amid depleting pandemic-era savings and tighter lending conditions.

“I expect spending and economic growth to remain quite slow over the rest of 2023,” Jefferson said, adding that it takes longer than a year for the economy to feel the full effects of higher interest rates.

The Atlanta Fed GDPNow model estimate for the second quarter was lowered from 2.9 percent to 1.9 percent.

Moreover, banks could face further stress from the banking turmoil fallout and the central bank’s rising-rate climate, “especially those that are highly exposed to longer-duration assets and have a relatively high ratio of uninsured deposits to total deposits,” he said.

To Pause or Not to Pause

There has been plenty of debate surrounding the two-day Federal Open Market Committee (FOMC) meeting in June.

Loretta Mester, president of the Federal Reserve Bank of Cleveland, told the Financial Times on May 31 that she does not “see a compelling reason to pause.”

“I would see more of a compelling case for bringing the rates up and then holding for a while until you get less uncertain about where the economy is going,” Mester said.

Policymakers should hit the pause button on a rate hike after 10 consecutive increases, said Philadelphia Federal Reserve Bank President Patrick Harker on May 31.

“I am in the camp increasingly coming into this meeting thinking that we really should skip, not pause, but skip an increase,” Harker said at a recent discussion hosted by Official Monetary and Financial Institutions Forum (OMFIF) Economic and Monetary Policy Institute.

Harker argued that restoring price stability was paramount, but the Fed should not damage the economy during this policy cycle. But the May, employment and consumer inflation reports that will be released before the June FOMC meeting could change his mind.

The consensus estimate is that the U.S. economy added 190,000 new jobs in May, and the unemployment rate would come in at 3.5 percent.

According to the Cleveland Fed’s Inflation Nowcasting, it is estimated that the monthly consumer price index will rise by 0.2 percent, and the annual CPI will slow to 4.1 percent. But core CPI is forecast to climb 0.5 percent month-over-month and slip to 5.3 percent year-over-year.

Meanwhile, Chicago Federal Reserve Bank President Austan Goolsbee is waiting for more data to be released before making a decision.

“I think the part that makes this job difficult is you got two simple goals, but the actions that the Fed takes take months, or even years, to work their way through the system,” he said in a May 28 interview with CBS News. “So the Fed has raised the interest rate by five full percentage points over the last year. That’s the fastest increase in decades, rivaling ever. And some part of that still has to work its way through the system.”

In the end, Thomas Barkin, president of the Federal Reserve Bank of Richmond, warns that the public should brace for “stubborn” inflation unless a sharp economic downturn occurs.

Still, there is plenty of “uncertainty of where rates need to go,” Barkin told a virtual event sponsored by the National Association for Business Economists on May 30.

The Federal Open Market Committee will meet on June 13 and June 14.