Federal Reserve (Fed) Vice Chairman Philip Jefferson said Thursday that “inflation has resulted from a cascade of shocks” at the Darden School of Business at the University of Virginia in Charlottesville, Virginia.

He commented that inflation expectations show the Fed is credible in tackling inflation, that the “Fed is firmly committed to returning inflation to 2% in a timely manner,” and that the economy is close to “maximum employment.”

Key highlights:

Inflation has resulted from a cascade of shocks

Longer-term inflation expectations show the Fed is credible on getting inflation down
The Fed has to be prepared to do the needed work to validate inflation expectations
Fed is firmly committed to returning inflation to 2% in a timely manner
The economy is quite close to maximum employment
Fed has more space to focus on inflation mandate right now
There is great wisdom in the Fed's dual mandate
It's possible AI will power big productivity gains down the road
I encourage the responsible development of AI
It is hard to say what AI has done to natural rate estimates so far
The Fed does not have great insight into private credit developments

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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