Fed's Jefferson Sees Downside Risks to Employment Increasing

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00:00Before the government shutdown, available data indicated that the U.S. economy was on a trajectory

00:05of moderate growth this year. The shutdown has likely curtailed economic activity within this

00:12quarter, reflecting furloughed federal workers and the suspension of government purchases of goods

00:19and services, including payments to contractors. There may also have been spillover effects to

00:27the private sector stemming from delays in federal payments, approvals, and other government

00:33activity. I see those effects as largely temporary and likely to reverse in the coming months.

00:42Thinking more broadly, I see the balance of risks in the economy as having shifted in recent months,

00:49with increased downside risk to employment compared to the upside risk to inflation,

00:58which have likely declined somewhat recently. In the labor market, information available in recent

01:06weeks appears to be consistent with a gradual cooling in both labor demand and labor supply.

01:13For instance, unemployment insurance claims received from the states have largely moved sideways in

01:21recent weeks. Anecdotal evidence about the state of the labor market have been mixed, with some firms

01:30announcing a slower pace of hiring or cutbacks, and other firms indicating that they are ready to move

01:37forward with previously delayed hiring and investment. I expect that the unemployment rate is likely to inch up

01:47slightly by the end of the year from the relatively low 4.3% recorded in August. While still solid, I continue to view

01:58the risk to my employment forecast as skewed to the downside. The latest available readings show that

02:09inflation is running at a rate similar to that of a year ago, a bit below 3%, indicating that progress towards

02:18our 2% target has stalled. This lack of progress appears to be due to tariff effects, with signs that

02:28inflation excluding the effects of tariffs may be continuing to make progress towards 2%. Some firms have indicated

02:40that they expect pass-through of pricing pressure from tariffs to pick up in the fourth quarter as the inventory

02:48of non-tariff merchandise is depleted. A reasonable base case is that tariffs result in a one-time shift in the price

02:59level, not an ongoing inflation problem. That view is reinforced by inflation expectation readings. Most measures of

03:10near-term inflation expectations have retraced their spring rise and market-based long-term inflation expectations continue to be well anchored.

03:22Several factors will influence the size and persistence of the rise in inflation. Those include the final tariff rates that are

03:31implemented, the extent and timing of pass-through to consumer prices, the reaction to supply chains and domestic manufacturing,

03:40and overall economic conditions. I will continue to monitor these factors closely. I remain firmly committed to returning

03:51inflation to the Fed's 2% target. Given that outlook, I supported last month's decision to reduce our policy rate by a quarter

04:03percentage point. That step was appropriate because I see the balance of risk as having shifted in recent months as

04:12downside risk to employment have increased. The current policy stance is still somewhat restrictive, but we have moved it closer to its

04:22neutral rate that neither restricts nor stimulates the economy. The evolving balance of risk understored the need to proceed

04:33slowly as we approach the neutral rate.