Federal Reserve Vice Chair Philip Jefferson said in a speech at the University of Virginia's Darden School of Business on October 1 that the risks to the U.S. economic and employment outlook are roughly balanced, while inflation risks are tilted to the upside.

He supported the September rate hike decision, while stating that the Fed may need more time to determine its next policy step and will continue to assess whether inflation can return to the 2% target quickly enough.

Inflation still above target, energy and AI investment add pressure

Data released on September 30 showed that the U.S. personal consumption expenditures (PCE) price index rose 3.4% year-over-year in August, while the core PCE price index, which excludes food and energy, rose 3.0% year-over-year; the two measures rose 0.3% and 0.2% month-over-month, respectively.

Jefferson listed energy prices as the main driver of the recent rebound in headline inflation and expressed concern about energy price increases feeding into broader, more persistent inflation.

He also noted that AI-related demand is pushing up production costs for some goods and services, and that the previous disinflationary effect of housing services prices has stalled.

His baseline judgment is that inflation will remain elevated in the near term and then fall back as price shocks such as energy fade. However, recent geopolitical developments and stronger-than-expected aggregate demand pose upside risks to this forecast.

Consumption remains resilient, economic and employment outlook roughly balanced

The latest consumption data provided support for the resilience of U.S. domestic demand. Nominal personal consumption expenditures rose 0.9% month-over-month in August, while real consumption expenditures, adjusted for price changes, rose 0.6%; over the same period, real disposable income was flat, and the personal saving rate was 4.1%.

Jefferson said the risks to the economic and employment outlook are roughly balanced: uncertainty stemming from the situation in the Middle East could weigh on growth, while further expansion of AI investment could drive economic performance beyond expectations. He expects the unemployment rate to remain roughly at its current level for the rest of the year.

The September policy statement also noted that U.S. economic activity is expanding at a solid pace, domestic spending remains resilient, capital investment is strong, employment growth is in line with the size of the labor force, and the unemployment rate has changed little.

Support for September rate hike, subsequent action depends on data

The Fed voted 12-0 on September 16 to raise the target range for the federal funds rate by 25 basis points to 3.75%-4.00%. The statement at the time made clear that the policy action was aimed at supporting a more timely return of inflation to the 2% target.

Jefferson said subsequent policy adjustments should be based on data trends, the economic outlook, and the balance of risks. Since the September meeting, U.S. Treasury yields across maturities have risen further, but the Fed still needs to form its own judgment. He will next focus on whether underlying trends show that inflation can return to target quickly enough and assess the appropriate policy stance accordingly.