Fed’s Jefferson Sees Upside Risks as PCE Inflation Runs at 3.4 Percent
Federal Reserve Vice Chair Philip Jefferson said on Thursday that he sees upside risks to inflation, which has exceeded the central bank’s 2 percent target for more than 5 years, while risks to growth and employment are roughly balanced, and that with yields higher since the September meeting he and his colleagues will need to come to their own judgment, “which may take more time”. Speaking at the University of Virginia’s Darden School of Business, he said he supported last month’s quarter point increase in the federal funds rate target range to 3.75 to 4 percent.
The numbers behind the view
| Indicator | Latest | Period |
|---|---|---|
| PCE inflation, 12 months | 3.4% | August |
| Unemployment rate | 4.1% | August |
| GDP growth, annual pace | 2.4% | First half 2026 |
| Federal funds target range | 3.75% to 4.00% | Since September |
As cited in the speech. Core inflation was described only as somewhat milder than the headline rate.
On our calculation, inflation at 3.4 percent sits 1.4 percentage points above target, and the 3.875 percent midpoint of the funds rate range is about 0.5 percentage point above August’s inflation rate. The 2 year Treasury yield fell 10 basis points on Thursday to 4.78 percent, about 90 basis points above that midpoint, and the 10 year fell 5 basis points to 5.24 percent, per our US Market Wrap. Jefferson noted that yields across the term structure have still increased since the September meeting, a sign that investors are reassessing the outlook.
Energy drives headline inflation as AI adds to core goods costs
He said energy prices, including gasoline and diesel, are the main driver of the recent pickup in headline inflation, and that the boom in AI related demand is driving unusually strong increases in the cost of producing related goods and services, contributing to the rise in core goods prices. Core services excluding housing have edged up this year. He expects growth near its first half pace, unemployment around its current level through year end, and inflation to stay elevated in the short run before resuming its decline toward 2 percent as energy and other price shocks fade. He said he remains concerned that higher energy prices could lead to a persistent rise in inflation more broadly.
Why it matters: With the labour market near maximum employment and inflation above target for more than 5 years, Jefferson said future policy adjustments should rest on trends in the data, the evolving outlook and the balance of risks, and that he will assess whether underlying trends suggest inflation will return to target with sufficient speed.
Outlook: The September employment report, due on Friday 2 October at 12:30 GMT from the Bureau of Labor Statistics, is the next major data point for the Fed’s assessment.
Sources: Federal Reserve, US Bureau of Labor Statistics, The Edge.
