Federal Reserve Gov. Adriana Kugler said it would be “appropriate” to lower U.S. interest rates if inflation continues to slow, but she stressed “it is critical” that inflation returns to the central bank’s target of 2%.
In her first speech as a senior Fed official, Kugler on Wednesday did not tip her hand on when a rate cut might be suitable. She indicated it would depend on how fast inflation decelerates.
Financial markets had expected a rate cut as early as March, but they have pushed out the odds of a reduction to May after a parade of Fed officials said they still weren’t ready to pull the trigger.
Kugler noted that inflation has slowed faster than the Fed and most Wall Street
The Fed’s preferred price guage, the PCE index, has slowed to a yearly rate of 2.9% in December from a 40-year peak of 7.1% in the middle of 2022.
“We have made great progress,” Kugler said in a speech to the Brookings Institution. The slowdown in inflation “that we have seen over the past year or so is the most dramatic since the early 1980s.”
Still, Kugler said she wants to see a further cooling in the U.S. labor market as well as rent and housing costs to be sure inflation is falling back to pre-pandemic norms.
As the demand and supply of labor come back into better balance, she said, wages will pressures will recede and help restore inflation to low pre-pandemic levels.
“So I am pleased with the disinflationary progress thus far and expect it to
continue, Kugler said. “I must emphasize, however, that the [Fed’s] job is not done yet.”
The Fed ratcheted up interest rates from March 2022 to the summer of 2023 to try to extinguish the worst bout of inflation since the early 1980s.
While higher rates dented home sales and hurt manufacturers, the broader U.S. economy has expanded at a surprisingly strong pace.
Fed officials say the resilience of the economy gives them more leeway to wait before cutting rates.