Fed official says inflation fight will take time, despite signs of progress

Fed governor Philip Jefferson says he fears that price changes in ‘goods to which people pay the most attention, like food and housing, will affect expectations of future inflation.’ (Photo: Bloomberg)
Fed governor Philip Jefferson says he fears that price changes in ‘goods to which people pay the most attention, like food and housing, will affect expectations of future inflation.’ (Photo: Bloomberg)

Summary

Governor Philip Jefferson says he remains concerned that consumers will expect higher prices to persist

Bringing inflation down from 40-year highs is likely to take time and will require a slowdown in economic growth and reduced demand for workers by employers, a Federal Reserve official said Tuesday.

Those efforts are showing tentative signs of progress, said Fed governor Philip Jefferson, in his first public remarks since taking office in May.

But Mr. Jefferson said he remains concerned that higher prices could change consumer expectations around inflation in a way that makes further price increases self-fulfilling.

“While oil and gasoline prices have come down in recent months, I am concerned that fluctuations in prices of the goods to which people pay the most attention, like food and housing, will affect expectations of future inflation," said Mr. Jefferson in remarks prepared for delivery at a Fed conference in Atlanta.

The Fed has approved rate increases of 0.75 percentage point at its last three meetings, most recently in September, bringing its benchmark short-term interest rate to a range between 3% and 3.25%.

Mr. Jefferson, who previously served as a professor of economics and an administrator at Davidson College in North Carolina, described the labor market as very tight. He highlighted the risk that an increase in job turnover could lead to upward pressure on wages, which could keep inflation elevated.

“In a market with more job openings than workers, the competition to fill vacancies is leading to rapid wage gains now, and the resulting salary compression may lead to further upward wage pressures in the future," he said.

Data released earlier Tuesday by the Labor Department showed that the number of open jobs in the U.S. economy dropped by 10% and layoffs rose slightly in August, signs that the labor market is starting to cool. Fed officials have been cautiously optimistic that they can slow demand for workers and moderate the pace of wage growth without large increases in unemployment.

A slowdown in growth this year is likely to ease supply and demand imbalances in labor markets somewhat, Mr. Jefferson said. “We have already seen some indications from survey data, information from transportation hubs, and producer prices that supply bottlenecks have, at long last, begun to resolve," he said.

San Francisco Fed President Mary Daly, in a separate appearance in New York Tuesday, said the decline in job postings could give officials room to fight inflation without causing painful job losses.

Ms. Daly said she’s heard from employers that they are posting fewer openings and hiring fewer people, which over time could take some pressure off the labor market.

“There’s a lot of room for us to slow the pace of hiring and still not dive into the third and most painful place that everybody fears, which is outright layoffs," she said.

When hiring slows to more sustainable levels “that will be to me consistent with indicators of inflation coming down," she said.

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