Fed's Jefferson Says Central Bank Should 'Proceed Slowly' As It Approaches The Neutral Rate

• Jefferson said that after the 25 bps rate cuts in September and October, interest rates are now closer to a neutral level than they were before.
• He explained that he supported the October rate cut because the risk of a further slowdown in the labor market had increased.
• The Fed Vice Chair explained that his stance going forward would depend on the incoming data, the evolving outlook, and the balance of risks.

Federal Reserve Vice Chair Philip Jefferson on Friday said that the central bank should now “proceed slowly” as it approaches the neutral rate, following the 25 basis point cut in October.

Speaking at an event in Frankfurt, Jefferson stated that after the 25 bps rate cuts in September and October, the interest rates are now closer to a neutral level than they were before.

“The current policy stance is still somewhat restrictive, but we have moved it closer to its neutral level that neither restricts nor stimulates the economy. Given this, it makes sense to proceed slowly as we approach the neutral rate.”

— Philip Jefferson, Vice Chair, Federal Reserve

He added that he supported the October rate cut because the risk of a further slowdown in the labor market had increased. “That step was appropriate because I see the balance of risks as having shifted in recent months as downside risks to employment have increased,” Jefferson said.

Path Forward

Jefferson did not specify if he would back another interest rate cut when the Federal Open Market Committee (FOMC) meets in December.

He added that he takes a meeting-by-meeting approach. “This approach is especially prudent because it is unclear how much official data we will have before our December meeting,” Jefferson said.

The Fed Vice Chair explained that his stance going forward would depend on the incoming data, the evolving outlook, and the balance of risks.

Impact Of AI

Jefferson also dived into the impact of artificial intelligence on the labor market. He explained that while there could be some job losses, the AI-fueled increase in productivity could reflect in economic growth, which could result in the creation of new employment opportunities.

He added that better productivity could also reduce inflationary pressures by lowering production costs and putting downward pressure on prices.

Meanwhile, U.S. equities declined in Friday’s pre-market trade. At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was down by 0.45%, the Invesco QQQ Trust ETF (QQQ) fell 0.67%, while the SPDR Dow Jones Industrial Average ETF Trust (DIA) declined 0.32%. Retail sentiment around the S&P 500 ETF on Stocktwits was in the ‘extremely bearish’ territory.

The iShares 7-10 Year Treasury Bond ETF (IEF) was down 0.08% at the time of writing.

Also See: Alex Karp Says Palantir’s Most Important Mission Is To 'Prevent Wars': Report

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