Federal Reserve Governor Adriana Kugler said on Wednesday that inflation is showing steady signs of slowing, but she is not yet ready to start cutting interest rates.
In her first major policy speech since being confirmed to the Board of Governors in September 2023, Kugler said three factors were converging to ease inflationary pressures: a moderation in wage growth, changes in how often companies raise prices and survey indicators that the rate of price increases is expected to continue to fall.
With all that in mind, however, Kugler wants more certainty that the time has come to cut rates.
“I am therefore pleased with the deflationary progress so far and expect it to continue. However, I must emphasize that the [Federal Open Market Committee’s] the job is not done yet,” she said in a speech at the Brookings Institution in Washington, DC
“At some point, the continued cooling of inflation and labor markets may make it appropriate to lower the target range for the federal funds rate,” Kugler added. “On the other hand, if progress on deflation stalls, it may be appropriate to keep the target range stable at its current level for a longer period of time to ensure continued progress on our dual mandate.”
The policymaker added that it expects consumer spending to pick up and core services inflation excluding housing to ease. In addition, he sees signs that companies that raised prices frequently during the high inflation of 2021-2022 are doing so less now.
If inflation continues to slide toward the Fed’s 2% target, that will likely lead to cuts later this year. However, like other Fed officials, Kugler did not commit to a timetable, despite pricing the market for aggressive tapering going forward.
“It all depends,” Kluger said of the pace of rate cuts once the Fed moves. “I don’t think we can call it now.” He even added that “every meeting is live”, which means that the committee has not ruled out the possibility of moving at any point.
As governor, Kugler, the first Latina to hold the position in Fed history, is a permanent FOMC voter.
“I am pleased with the progress in inflation and optimistic that it will continue, but I will be watching economic data closely to verify the continuation of this progress,” Kugler said.
Fed officials have generally expressed broad satisfaction with the balance of growth and inflation as the central bank tries to steer the economy back to stable inflation without halting growth.
“That drumbeat you’re hearing is the soft landing,” Richmond Fed President Thomas Barkin said during an appearance at the Economics Club of Washington, DC.
“All these metrics are very strong and inflation is coming down. So I’m very supportive of being patient to get where we need to go,” he added. “I see that at this point, the exchange, which is coming into better balance, is still in favor of continuing to work on inflation.”
Earlier in the day, Minneapolis Fed President Neel Kashkari also expressed caution about cutting interest rates too quickly.
Two or three rate cuts are expected
“I would say sitting here today, two or three cuts would seem appropriate to me right now,” Kashkari said during a CNBC interview. “Squawk Box” interview. “But again, I don’t want to prejudge things, but that’s, that’s my gut, based on the data we have so far.”
Markets are pricing in an aggressive path this year for the Fed, with the first tapering coming as soon as May and five total percentage point cuts before the end of the year, according to CME Group’s FedWatch metric of futures prices.
But many Fed officials pushed back against that narrative. Fed Chairman Jerome Powell a week ago and again during a “60 Minutes” interview that aired Sunday on CBS completely cut out March and said he expects policymakers to tread carefully as they gauge the progress of inflation against wider economic development.
“We just have to look at the actual inflation data to guide us,” Kashkari said. “So far, the data has been extremely positive. I hope it continues. And then the question will just be, at what pace do we start adjusting rates back?”
He added that there are “compelling arguments to suggest that we could be in a longer, higher-paced environment going forward.”
Kashkari is a non-voting member this year on the FOMC.
Earlier this week, he wrote an essay published on the Minneapolis Fed’s website suggesting that the real Fed funds rate when adjusted for inflation may not be as high as it seems. In a series of hikes that ran from March 2022 to July 2023, the FOMC raised its benchmark overnight lending rate from near zero to a target range of 5.25%-5.5%, the highest in 23 years .
However, the financials remained stable during that period. Kashkari said the trend shows interest rates may not be putting as much pressure on the economy as expected. Labor market growth remained strong as consumers continue to spend.
“This is all really good news, and it tells me that maybe monetary policy isn’t putting as much downward pressure on demand as we might otherwise think,” he said. “That gives us more time to get access to that data before we start cutting rates. So I think that’s a good problem to have.”
Also on Wednesday, Boston Fed President Susan Collins added a cautionary tone, saying recent signs of strengthening consumption and employment suggest it may take some time for the economy to settle into a 2% inflation rate.
“While I am encouraged by the progress to date, I will need to see more evidence before I think about adjusting the policy stance,” Collins said in a speech at the Economic Club of Boston. “As we gain more confidence in the economy meeting the committee’s goals, and in line with the latest set of forecasts from FOMC participants, I believe it will likely be appropriate to begin easing policy tightening later this year.”
However, Collins did not set a timetable for when it would be appropriate to cut rates. In addition, he noted that the road back to the Fed’s inflation target could become “bumpy” and stressed the importance of a policy determined to beat inflation.
There are several Fed speakers throughout the day. This story will be updated to reflect other developments.