Fed’s Kugler Signals Optimism On Inflation, Labor Market, But Warns ‘The Job Is Not Done Yet’

Federal Reserve Governor Adriana Kugler expressed optimism about the ongoing reduction in inflation and the balance of the labor markets at a Brookings event on Tuesday, hinting at the potential for a reduction in the federal funds rate.

At the same time, the Fed official emphasized the central bank’s work toward achieving its price stability goal is far from over, signaling a cautious approach to future monetary policy adjustments.

Kugler Expects Lower Interest Rates If Inflation, Labor Market Cool Further

“The pace of inflation continues to slow,” Kugler said, highlighting a significant decrease from a peak of 7.1% in June 2022 to 2.6% in December for the the personal consumption expenditures index.

Kugler elaborated on the labor market’s condition, remarking on the “moderation of wage growth associated with the ongoing cooling of the labor market.” This moderation is crucial for sustaining disinflation, especially in labor-intensive service industries where wage growth slowdown is key to reducing inflationary pressures.

Looking ahead, Kugler said she anticipates continued job growth but cautioned that “labor market conditions can change very quickly,” as history has showed.

Despite the positive trends, Kugler maintained a vigilant stance on the inflationary outlook.

“So I am pleased with the disinflationary progress thus far and expected to continue,” she said. “I must emphasize, however, that the committee’s job is not done yet.”

This caution stems from the understanding that economic conditions can shift quickly, affecting the trajectory toward the Fed’s inflation target.

Addressing potential policy adjustments, Kugler suggested, “At some point, the continued cooling of inflation and labor markets may make it appropriate to reduce the target range for the federal funds rate.”

She was quick to add a caveat, indicating that if progress on disinflation stalls, maintaining the current policy stance would be crucial to ensure continued advancement towards the FOMC’s objectives.

“Having lived in Colombia during periods of high and volatile inflation, I know firsthand how destructive it can be.”

When questioned on the escalating risks facing U.S. regional banks, Kugler said the Fed is closely monitoring these institutions’ exposure to…