KANSAS CITY, Mo.—Federal Reserve Vice Chair Philip Jefferson told an audience at the Federal Reserve Bank of Kansas City that the U.S. economy is contending with temporary disruptions from the government shutdown but remains on a course of moderate growth—an outlook with important implications for financial institutions watching interest rates, inflation, and liquidity conditions.
Jefferson said the shutdown has delayed key federal data releases, forcing policymakers to rely more heavily on Reserve Bank surveys, private-sector reports, and direct feedback from businesses. While furloughs and halted government spending likely trimmed economic activity this quarter, he described those effects as temporary and said recent trends suggest downside risks to employment have grown even as inflation risks have eased somewhat.
On the labor front, Jefferson said indicators point to a gradual cooling in both job openings and hiring, with unemployment expected to rise slightly from August’s 4.3% level. He noted that business reports are mixed—some firms pulling back, others moving ahead with delayed investments—leaving him cautious about near-term labor-market strength.
Inflation, meanwhile, appears stuck just below 3%, a rate Jefferson attributed largely to tariff effects rather than renewed economic overheating. He emphasized that inflation excluding tariff influences continues to move toward the Fed’s 2% target, supported by stable long-term inflation expectations. The key question, he said, is how strongly pricing pressures from tariffs will flow through to consumers as inventories turn over.
For financial institutions, Jefferson’s most substantive policy signals centered on interest rates and balance-sheet strategy. He reiterated his support for last month’s quarter-point rate cut, arguing the Fed needed to adjust policy as employment risks rose.
He also backed the decision to end balance-sheet runoff on Dec. 1 after securities holdings declined by $2.2 trillion since mid-2022—moves that had begun to push repo rates and the effective federal funds rate higher relative to the interest on reserve balances. The Fed will now hold the balance sheet steady for a time, continue allowing agency securities to roll off, and reinvest those proceeds into Treasury bills to realign the portfolio’s maturity profile.
Jefferson closed by noting that the lack of official data ahead of the next Federal Open Market Committee meeting makes a “meeting-by-meeting” approach even more essential. He reaffirmed his commitment to returning inflation to 2% and said policy decisions will continue to depend on incoming data, the economic outlook, and the evolving balance of risks.