Federal Reserve Vice Chair Philip Jefferson said he is watching the increase in Treasury yields as a potential further restraint on the economy even though the rate of inflation remains too high.
Officials are "in a position to proceed carefully in assessing the extent of any additional policy firming that may be necessary," Jefferson said Monday in a speech at a National Association for Business Economics conference in Dallas.
"Looking ahead, I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy."
After raising the benchmark federal funds rate by more than five percentage points over the past year and a half, a majority of US central bankers at their September policy meeting projected it would be appropriate to enact one more quarter-point increase by the end of 2023.
Yields on US government 10-year notes are up about 40 basis points since the September meeting. Fed officials including San Francisco's Mary Daly and Lorie Logan of Dallas noted the recent tightening of financial conditions may substitute for additional rate hikes.
"We are in a sensitive period of risk management, where we have to balance the risk of not having tightened enough, against the risk of policy being too restrictive," Jefferson said.
Futures markets show less than 20% chance of a 25 basis-point increase at the upcoming Oct. 31-Nov. 1 policy meeting, and similar odds on a hike at the final meeting of the year in December.
Answering questions after his speech, the vice chair said he wouldn't want to prejudge how the Fed would respond to economic developments.
"Our responsibility is to bring inflation down to 2% and to be nimble with regards to what may or may not be happening in the economy as we go forward," Jefferson said. "I would want the public to know that we're going to be mindful, whatever is happening, and we will use data in real time to pick an appropriate response."
In spite of rising borrowing costs, the US economy has shown surprising resilience. The labor market added 336,000 jobs in September, according to fresh data published Friday.
Jefferson in his speech listed risks on both sides of the outlook, from the potential impact of slower growth in China and Europe on the US to a labor market that might remain "too strong to achieve further disinflation."
—With assistance from Edward Dufner.
