MNI: Fed’s Kugler Says Easing Likely Appropriate Later in 2024

Federal Reserve Governor Adriana Kugler struck an optimistic note on inflation Tuesday, saying she’s hopeful that continued progress toward 2% will allow the central bank to begin cutting interest rates before the end of the year.

“If the economy evolves as I am expecting, it will likely become appropriate to begin easing policy sometime later this year,” Kugler said in remarks prepared for the Peterson Institute for International Economics.

“While I remain cautiously optimistic that inflation is coming down, it is still too high, and it is moving down only slowly. I believe that policy has more work to do.”

Kugler cited several reasons for being hopeful that the inflation progress of the latter half of last year, which appeared to have stalled in the first quarter, has resumed.

“That progress may have paused in the first three months of the year, but information since then on economic activity, the labor market, and inflation points to renewed progress,” she said. (See MNI INTERVIEW: Fed To Cut Twice in ‘24, Start Sept.-Sheets)

REASONS TO BE HOPEFUL

Rising productivity and well anchored inflation expectations are among the reasons for her fairly benign view of the inflation outlook.

“I was encouraged by some of the details of the recent reports, particularly the continued improvement in market-based services inflation, which is based on observation of actual market prices rather than imputed values. That’s important because market-based prices are likely to be a better indication of the overall trend for core services inflation than nonmarket prices,” said Kugler

She cited Beige Book data showing firms are increasingly having a hard time passing on higher costs to consumers – and other figures showing business costs themselves have eased.

“I have gleaned from recent earnings reports by publicly traded companies that lower-income consumers are pulling back from their purchasing and that firms are responding by moderating price increases or, in some cases, actually cutting prices,” she said.

“I am also cautiously optimistic about productivity growth, which is a source of supply expansion that is likely to put downward pressure on inflation without slower economic growth.”

Against that backdrop, Kugler believes monetary policy is well calibrated with rates at a 23-year high of 5.25%-5.5%.

“I believe the current stance of monetary policy is sufficiently restrictive to help cool the economy and bring inflation back toward 2% without a sharp contraction in economic activity or a significant deterioration of the labor market,” she said.