Federal Reserve officials kept a hawkish line on Friday, the day October producer prices confirmed pipeline inflation at its highest annual rate since November 2022. Boston Fed President Susan Collins warned that higher interest rates may sometimes be necessary to control inflation, even as borrowing costs continue to make housing less affordable, Bloomberg reported. Collins acknowledged the strain on housing but put long-term price stability first.
Vice Chair Philip Jefferson, speaking at UC San Diego, made the same hierarchy explicit. Inflation remains notably above the committee’s 2 percent target, he said: the 12-month change in the personal consumption expenditures price index was 3.6 percent in September, core PCE inflation was 3.1 percent, and data received so far for October remain consistent with well above-target inflation. He said he remains concerned that higher energy prices could lead to a persistent rise in inflation more broadly, while noting that most longer-term inflation expectations measures have stayed stable at levels consistent with 2 percent.
On the real economy, Jefferson said growth has gained momentum, expanding at a 3.4 percent pace in the third quarter, with the unemployment rate settling at 4.1 percent in October, a level he views as consistent with maximum employment. He voted with the majority last month to hold the federal funds rate steady. Data since that meeting, he said, show activity and labour conditions broadly solid while inflation readings show persistent price pressures, so he sees the trajectory of inflation as providing the more important signal for the appropriate stance of policy, with further adjustments determined by the data, the outlook and the balance of risks.
Jefferson also addressed the question hanging over the tightening debate: whether artificial intelligence productivity gains will do the disinflationary work for the Fed. His judgement is that AI’s contribution to aggregate productivity so far is limited, though it could grow substantially, and that expectations of those gains are already lifting demand, equity prices and data centre investment in ways that put upward pressure on prices today. If permanently higher productivity growth does arrive, he noted, it could raise the longer-run neutral rate of interest, which would mean any given policy rate is effectively less restrictive.
Taken together, the two appearances leave the December 8 to 9 meeting framed the way the bond market has already framed it. Employment is not the argument against tightening, housing is not the argument against tightening, and the productivity story is not yet an argument against tightening. Inflation is the signal both officials said they are watching.