MNI: Fed Gov Kugler Expects 'Some Lowering' Of Rates This Year

The Federal Reserve should cut interest rates this year if expectations for inflation to head lower without a broader U.S. economic slowdown pan out, Fed Governor Adriana Kugler said Wednesday.

"Most FOMC participants expect that it will be appropriate to begin lowering the federal funds rate sometime this year," she said. "My own expectation is consistent with that; if disinflation and labor market conditions proceed as I am currently expecting, then some lowering of the policy rate this year would be appropriate."

With 12-month core PCE inflation now at 2.8%, the Fed has made considerable progress toward its price stability objective, she said, and "I expect the disinflationary trend to continue."

January and February inflation data showing a bit of bumpiness, but the January numbers in particular "featured some atypical or seasonal factors that suggest a need to withhold judgment," Kugler said in remarks prepared for the Weidenbaum Center on the Economy, Government, and Public Policy at Washington University in St. Louis.

"Policy is currently restrictive, and my baseline expectation is that disinflation will continue without a broad economic slowdown — though such an outcome is not assured," Kugler said. "I will remain attentive to the totality of the data and be prepared to change my economic and policy outlook if conditions change."

Demand shocks accounted for roughly two-thirds of both the 2021 pickup in core inflation and the 2023 slowing of price growth, and supply shocks accounted for a third, she said, citing San Francisco Fed research, adding that continued disinflation will require further progress in housing and non-housing services.

As labor markets moved into better balance, wage growth has cooled, easing inflation pressures in the services sector, Kugler said. "There is still a bit of room for further supply improvement, especially in the services sector, where solid labor supply growth will continue to ease wage and inflation pressures." (See: MNI INTERVIEW: ISM Sees Choppy But Resilient Service Growth)