By Howard Schneider
(Reuters) -Recent inflation data point to continued progress toward meeting the U.S. Federal Reserve’s 2% inflation goal, but the outlook is now uncertain due to the possibility new import taxes will drive prices higher, Fed Vice Chair Philip Jefferson said on Wednesday.
Consumer prices in April rose less than analysts expected, but “there is much uncertainty…around the future path of inflation,” Jefferson said in comments prepared for delivery at a New York Fed event. “If the increases in tariffs announced so far are sustained, they are likely to interrupt progress on disinflation and generate at least a temporary rise in inflation.
“Whether tariffs create persistent upward pressure on inflation will depend on how trade policy is implemented, the pass-through to consumer prices, the reaction of supply chains, and the performance of the economy.”
Jefferson said he supported holding the policy rate of interest steady at the last Fed meeting, and felt the current “moderately restrictive” level, in a range of 4.25% to 4.5%, was “well positioned to respond to developments that may arise.”
Jefferson said he regarded the labor market as still “solid,” and felt that the slight contraction in U.S. economic output over the first three months of the year was distorted by import data that overstated the degree to which the economy was slowing.
Still, Jefferson said, sentiment among businesses and households has declined, and he was “watching very carefully for signs of weakening economic activity in hard data.”
He does expect economic growth to slow over the year, but to remain positive.
The steady flow of tariff announcements from the Trump administration, driving import levies to record heights only to see the most aggressive actions postponed, has left the Fed struggling to determine the ultimate impact on prices, growth and employment.
For now policymakers say they are on standby as trade and other policy changes are finalized and their effect on the economy can be studied.
(Reporting by Howard Schneider; Editing by Andrea Ricci)
