Fed’s Jefferson: FOMC ‘Well-Positioned’ To Face Upside Inflation, Downside Job Risks

–– Williams: FOMC Is Now ‘Really Well-Positioned’ To ‘Wait and See’

— Goolsbee: Fed in ‘Very Uncomfortable Situation; Facing Danger of ‘Stagflation’

By Steven K. Beckner

(MaceNews) – Federal Reserve Vice Chairman Phillip Jefferson said Tuesday evening that monetary policy is “well-positioned” in a war-influenced environment of both upside risks to inflation and downside risks to employment.

Earlier Tuesday, two other top Fed officials expressed similar sentiments regarding the economic and policy implications of the Iran war and related oil price spike.

New York Federal Reserve Bank President John Williams warned that rising oil prices are likely to cause more “elevated” inflation, but echoed Chairman John Powell in saying monetary policy is “really well-positioned.”

The Fed officials’ remarks came before the late evening announcement of a two-week ceasefire between the United States and Iran accompanied by the reopening of the Strait of Hormuz, at least for those two weeks. Oil prices almost immediately collapsed with domestic crude falling to around $94.

A self-described “nervous” Chicago Fed President Austan Goolsbee expressed concern that the Iran oil shock, if it persists, could push the economy into “stagflation,” with rising energy costs potentially pushing up inflation and simultaneously causing consumer spending to cease driving economic growth and employment.

War-related uncertainty and the threat of “stagflation” have put monetary policymakers in “a very uncomfortable situation,” said Goolsbee, who added that for the time being, he’s inclined to “sit on (his) hands.”

The comments come three weeks after the Fed’s policymaking Federal Open Market Committee left the federal funds rate unchanged for a second straight meeting in a target range of 3.50-3.75%, after cutting that key money market rate by 75 basis points in the final three meetings of 2025 and 175 basis points since September 2024.

In their revised Summary of Economic Projections, the 19 FOMC participants projected a single 25 basis point rate cut by the end of 2026, taking the funds rate down to a target range of 3.25% to 3.50% (a median 3.4%).

In a revised policy statement on March 18, the FOMC declared that “the implications of developments in the Middle East on the economy are uncertain.” In his post-FOMC press conference that day, Powell said “we just don’t know” how Middle East developments will evolve. Therefore, he said, the FOMC’s best course is to “wait and see” whether it should change its “moderately restrictive” policy stance.

Last Monday, Powell continued to speak in that vein at Harvard University. Faced with yet another “supply shock” while still coping with the impact of tariffs, he said the economy faces both “downside risks to the labor market, which suggests keeping rates low, and upside risks to inflation, which suggest you don’t keep rates low.”

Given the Iran uncertainties, he repeated that monetary policy is “well-positioned” to respond as needed.

Powell said the Fed had “pretty much gotten to” the Fed’s 2% target by the end of 2024, without a recession, before the “one-time” effect of tariffs had driven prices up by 0.5 to 0.8 percentage points. But “now, we’re facing events in the Middle East” driving up oil prices.

Powell said monetary policy is “in a good place” to react to that situation, but “it’s way to early to know” what that may involve. In any case, he repeated “policy is in a good place to wait and see.”

Vice Chairman Jefferson had much the same take in a speech to t the College of Business Administration, University of Detroit Mercy, Detroit, Michigan Tuesday night.

“In the current environment, I confront an outlook in which there is downside risk to the labor market and upside risk to inflation,” he said. “While that is a potentially challenging situation, I am confident that our current policy stance is well-positioned to respond to a range of outcomes.”

Jefferson said he supported the FOMC’s stand pat decision last month, because previous funds rate reductions had “put the rate broadly in the range of neutral, or a rate that neither stimulates nor constrains the economy.”

He said “the current stance should continue to support the labor market while allowing inflation to resume its decline toward our 2% target as the effects of tariff pass-through are completed.”

And Jefferson added that “I believe that the current stance allows us to determine the extent and timing of additional adjustments to our policy rate based on the incoming data, the evolving outlook, and the balance of risks.”

But the Board’s number two man was by no means comfortable with the situation the Fed now finds itself in.

Before the war, he said it had been his  expectation that “the disinflationary process would resume once higher tariffs are no longer pushing up consumer prices. In addition, the strong productivity growth and deregulation efforts … may further help in bringing inflation down to our 2% target.”

However, Jefferson said “the recent increase in energy prices … will apply some upward pressure on headline inflation, at least in the near term.” And he said “the ongoing trade policy uncertainty and geopolitical tensions pose upside risk to my inflation forecast.”

He also saw potential problems for the labor market. “If the current elevated level of uncertainty persists, there is a risk that firms’ reluctance to hire could also persist and hold down job growth for longer.” He said he “will remain attentive to the pace of job growth going forward as I assess the extent of potential fragilities in the labor market.”

Still, overall, I see the labor market as roughly in balance, and my baseline forecast is for the unemployment rate to remain roughly steady this year.

Williams, the FOMC vice chairman, said Tuesday he is “looking at an inflation rate for the year as a whole of something like 2.75%,” depending on what happens with energy prices.

But Williams, in a Bloomberg interview, insisted  monetary policy is “really well positioned” for the FOMC to “wait and see” how the war affects the economy.

Goolsbee, who also spoke Tuesday in a discussion with the Detroit Economic Club. has often said the Fed should be able to resume lowering interest rates later this year, but he made clear that the war has put that option on hold indefinitely.

Goolsbee, who will return to the FOMC voting ranks next year, said the Fed’s policymaking body is “now in very uncomfortable situation,” without “an obvious cookbook.”

Although the Fed’s job is to “stabilize prices and maximize employment,” it now faces a combination of rising inflation and softening employment, he said, warning that this hint of “stagflation” could worsen and present the FOMC with a worse policy dilemma.

The biggest worry for Goolsbee is the inflation side of that dilemma.

“We just spent painful several years getting inflation down,” he said, noting that inflation had gotten down close to the Fed’s 2% target, before higher tariffs caused inflation to edge back up to 3%.

“The hope was that the tariffs would be a one-time thing…,” Goolsbee said, but “my concern at this immediate time that we’ve got to get our heads around (is whether) the oil shock is going to drive up prices in a stagflationary way before the other (tariff impact on prices) has gone away.”

Asked about Wall Street forecasts of 4% inflation, Goolsbee physically shuddered before saying, “the longer you go and the higher your are, (inflation) gets ingrained in cost-plus contracts.”

“We were waiting for that (tariff effect) to fade out; now we add the oil shock,” he elaborated. “Hopefully that will turn out to be temporary as well,” but the Fed can’t be sure.

In this “very uncomfortable situation,” Goolsbee said he fees “nervous, cautious” and inclined to “sit on my hands.”

Despite a series of shocks, consumer spending has so far kept the economy “chugging along” with unemployment at a relatively low 4.3%, he said, but he warned of a potentially bad scenario: “The possibility of a stagflation outbreak coming from high oil prices before the tariff inflation went away, leading to the main engine of growth, the consumer, just giving up and saying we don’t have confidence, we’re going to start hording our money and sending us into stagflation would be the worst outcome.”