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.
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.
To Pause or Not to PauseThere has been plenty of debate surrounding the two-day Federal Open Market Committee (FOMC) meeting in June.
"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.
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.
Meanwhile, Chicago Federal Reserve Bank President Austan Goolsbee is waiting for more data to be released before making a decision.
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.
The Federal Open Market Committee will meet on June 13 and June 14.