MNI: Fed’s Kugler Strongly Backed 50BP Cut, More Cuts Ahead

Federal Reserve Governor Adriana Kugler said Wednesday she strongly backed the FOMC’s half point interest rate cut last week, adding she expects additional reductions in borrowing costs if the economic outlook develops as she foresees.

“The combination of significant ongoing progress in reducing inflation and a cooling in the labor market means that the time has come to begin easing monetary policy, and I strongly supported the decision last week by the Federal Open Market Committee to cut the federal funds rate by 50 basis points,” Kugler said in prepared remarks.

“While future actions by the FOMC will depend on data we receive on inflation, employment, and economic activity, if conditions continue to evolve in the direction traveled thus far, then additional cuts will be appropriate.” (See MNI INTERVIEW: Fed To Slow Cuts As Inflation Lingers-Roberts)

Kugler said the labor market remains resilient but has moderated significantly toward a state of better balance as tighter monetary policy weighed on the economy and labor supply expanded.

AVOID UNNECESSARY PAIN

Job creation has fallen to a "healthy" three-month moving average of 116,000 per month from 267,000 in the first quarter of the year, and unemployment has edged up to 4.2%, "still quite low by historical standards," she said.

The fall in diffusion indexes also suggests the cool-off in hiring has been broad based, complementing the payroll data in showing rebalances in demand and supply across sectors, she said.

“Given recent revisions in the payroll numbers, it is important to continue monitoring additional labor market indicators,” said Kugler.

"The labor market remains resilient, but the FOMC now needs to balance its focus so we can continue making progress on disinflation while avoiding unnecessary pain and weakness in the economy as disinflation continues in the right trajectory," she said. (See: MNI INTERVIEW: Fed Rates Headed To 4% In Quick Order - Bullard)

INFLATION PROGRESS

The governor sounded an optimistic note on inflation, citing a number of reasons why she thinks the downward trend will continue, including the prospect of further shelter cost disinflation.

“New rent increases, which better capture rental price changes in real time, are falling and are the main reason why I expect housing services costs to moderate further,” Kugler said.

She also cited improvements in supercore measures of inflation.

“Inflation for services excluding housing is declining, after a temporary escalation in the first quarter of this year that was likely partly due to residual seasonality,” said Kugler.