MNI: Fed’s Kugler-Policy 'Well Positioned' For Uncertainty
MNI (WASHINGTON) - Federal Reserve policy is in a good place to deal with possible risks to the central bank’s dual mandate of stable prices and maximum employment, Fed Governor Adriana Kugler said Tuesday.
“It is important to emphasize that policy is not on a preset course. I will make decisions meeting by meeting and carefully assess incoming data, the evolving outlook, and the balance of risks. I view our current policy setting as well positioned to deal with any uncertainties we face in pursuing both sides of our dual mandate," she said in prepared remarks to the Detroit Economic Club.
Kugler said she is on guard for possible negative shocks to the economy, after what she describes as two positive ones – increased immigration and stronger productivity – that have allowed inflation to come down with relatively little pain in the economy and job market.
“While I have gained more confidence that the two positive supply shocks I described have helped create the solid economic conditions that are currently in place, I will vigilantly monitor for incoming risks or negative supply shocks that may undo the progress that we have achieved in reducing inflation,” she said.
It’s too early to judge the likely impact of policy proposals coming from the new administration she said, “but I have observed that the trade policy uncertainty index has risen in recent months, likely reflecting risks of changes in trade policy.” (See: MNI INTERVIEW: Ex-Fed's Blinder Sees Stagflation Shock Ahead)
POSITIVE SHOCKS
Kugler credited a surge in immigration that was originally missed in the statistics as helping to explain why payroll growth remained so strong despite expectations that the labor market might be hitting a wall.
“Estimates of population growth were revised substantially higher, according to a Congressional Budget Office report,” she said. “That information was consistent with my hypothesis that the strength in the economy was in part due to a larger-than-estimated labor force, or what economists call a positive supply shock.”
On the productivity side, Kugler credited a jump in small business formation and a large amount of job switching post-pandemic as factors unexpectedly boosting how much workers are getting done.
“It has been shown that newer firms foster innovation and boost productivity growth. Also, in the post-pandemic period, workers switched jobs at much higher rates than typical. This likely led to better matches where workers can find more productive uses of their skills,” she said. “Therefore, immigration can also contribute to improvements in job matches in specific but key sectors.”
Firms also invested in technology as the economy recovered, she added, further boosting the economy’s potential.
“This is hugely important development because it increases the productive capacity of the economy and allows more rapid economic growth without overheating.”