Fed's Case for Rate Cuts is 'Pretty Weak,' Says Hubbard

Glenn Hubbard, Dean Emeritus at Columbia Business School, discusses the impact of AI and Fed independence on the US economy.

Federal Reserve Vice Chair Philip Jefferson on Monday said he sees increased downside risks to employment, though repeated his view that policymakers need to proceed slowly as interest rates approach neutral.

“I see the balance of risks in the economy as having shifted in recent months with increased downside risks to employment compared to the upside risks to inflation, which have likely declined somewhat recently,” Jefferson said in the text of a speech he’s scheduled to deliver Monday at the Kansas City Fed.

Jefferson’s remarks suggest he is keeping options open on whether to ease rates or hold steady when policymakers next meet on Dec. 9 -10. Fed officials cut their benchmark rate last month by a quarter percentage point, reflecting continued worry over the labor market.

Fed Chair Jerome Powell, speaking to reporters after the decision, said another cut in December was “not a forgone conclusion.” Recent hawkish commentary from other Fed officials has pushed down the odds for a December cut to about 40%, from near 100% just before the Fed’s October gathering, according to federal funds futures contracts.

While Jefferson expects unemployment to inch up slightly by the end of the year, available information suggests a gradual cooling in the labor market, for both demand and supply, he said.

A recent paper by authors including Glenn Hubbard, who chaired George W. Bush’s White House Council of Economic Advisers, and Douglas Elmendorf, a former Congressional Budget Office director during the Obama administration, concluded that deregulatory policies could boost economic growth — but the magnitudes are uncertain because of limitations on empirical evidence.

Progress toward the Fed’s 2% inflation target appears to have stalled, likely reflecting the impact of tariffs, Jefferson said.

“This lack of progress appears to be due to tariff effects, with signs that inflation excluding the effects of tariffs may be continuing to make progress toward 2%,” he said. “A reasonable base case is that tariffs result in a one-time shift in the price level, not an ongoing inflation problem.”

On the outlook for policy, Jefferson said in his speech that he will be guided by data and will take a meeting-by-meeting approach to deciding policy.

“This is an especially prudent approach at this time,” Jefferson said.

In a question-and-answer session following his speech, Jefferson described the labor market as sluggish, noting that companies are hesitant to both hire and fire workers.

“It’s difficult to know how long that’s going to be the case,” he said.

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