October rate hike expectations cool further, Federal Reserve Vice Chair Jefferson: Assessing the next move may require more time

Federal Reserve Vice Chair Philip Jefferson stated that it may take more time before policymakers can determine whether further interest rate hikes are needed to curb inflation.

Jefferson warned that inflation has remained elevated for too long and believes that the risk of inflation continuing to stay high still exists. However, he also said that he and his colleagues are responding to a series of economic shocks and need to carefully assess upcoming economic data before deciding their next steps.

On Thursday, Jefferson spoke at the University of Virginia in Charlottesville:

“Looking ahead, my view is that any future policy adjustments should be determined by carefully examining data trends, the evolving outlook, and the balance of risks. My colleagues and I need to make our own judgments, and this may take more time.”

Jefferson's remarks were a response to statements by New York Fed President John Williams. Williams said on Tuesday that after the Federal Reserve's decision to raise interest rates in September, there is no urgency to consider another rate hike.

Earlier this week, based on Federal funds futures pricing, the market estimated a roughly 70% probability that the Fed would raise interest rates again in October. However, Williams' comments and Wednesday’s release of PCE data reduced this expectation to below 35%. After Jefferson’s speech, the expectation further declined to 24%.

Federal Reserve policymakers voted unanimously at the meeting held September 15-16 to raise interest rates by 25 basis points, marking the first rate hike since 2023. According to their median forecasts, they also indicated support for raising rates once more this year and again next year.

The Economy and Labor Market Remain Strong

In his speech, Jefferson described the recent interest rate hike as an important step to ensure long-term inflation expectations remain well-anchored. He noted that economic activity and the labor market remain robust.

“Since our September meeting, yields across the entire term structure have risen, which suggests investors are reassessing the ever-changing macroeconomic landscape,” he said.

Jefferson pointed out that rising energy prices, the strong artificial intelligence (AI) boom, and shocks such as tariffs are having ripple effects on the economy.

“When we formulate policy to achieve our dual mandate goals, we do not have the luxury of viewing any of these shocks in isolation,” Jefferson said. “Instead, we must consider how this chain of shocks might affect the economy as a whole.”