Fed's Jefferson sees risks to both employment, inflation

By Ann Saphir

April 7 (Reuters) - Federal Reserve Vice Chair Philip Jefferson on Tuesday reiterated his view that short-term borrowing costs are set appropriately to allow the central bank to respond as needed to the uncertain effects of rising energy prices and the conflict in the Middle East on the Fed's two mandates of price stability and full employment.

"In the current environment, I confront an outlook in which there is downside risk to the labor market and upside risk to inflation," he said in remarks prepared for delivery at the University of Detroit Mercy. "I remain cautious about my outlook.... I continue, however, to see our current policy stance as appropriately positioned to allow us to assess how the economy evolves."

Last month, Fed policy makers left the policy rate on hold in the 3.50%-3.75% range and signaled a desire to see more progress on inflation before cutting interest rates any further.

Jefferson, like many of his colleagues, said he feels the labor market is roughly in balance, though vulnerable to adverse shocks because businesses are already reluctant to hire.

A sufficiently large negative shock, he said, could slow job gains and drive up the unemployment rate, now at 4.3%.

Meanwhile, again like many of his colleagues, he noted his concern that inflation remains above the Fed's 2% target. While he had expected inflation to ease later this year as the effect of last year's tariff shock recedes, he now expects it to rise, at least in the short term, because of the oil shock.?

The current monetary policy setting should continue to support the labor market while allowing inflation to resume its decline, he said.

And while higher energy prices pose upside risks to his inflation forecast even as he worries they could weigh on consumer and business spending if they persist, he said, "I am confident that our current policy stance is well-positioned to respond to a range of outcomes."

(Reporting by Ann Saphir; Editing by David Gregorio)