Federal Reserve Governor, Adriana Kugler, has stated that it would be “appropriate” to lower interest rates in the United States if inflation continues to decline. However, Kugler emphasized the importance of inflation returning to the central bank’s target of 2%.
In her inaugural speech as a senior official at the Fed, Kugler did not reveal when a rate cut might occur. Rather, she indicated that the timing would depend on the pace at which inflation decelerates.
Initially, financial markets anticipated a rate cut as early as March. However, after a series of statements from Fed officials suggesting their reluctance to make such a move, the market has since pushed back the odds of a reduction to May.
Kugler acknowledged that inflation has slowed more rapidly than anticipated by both the Fed and most Wall Street economists. The preferred price gauge of the Fed, the PCE index, decreased to an annual rate of 2.9% in December from its peak of 7.1% in mid-2022 – the highest rate in 40 years.
“We have made substantial progress,” expressed Kugler during her speech at the Brookings Institution. She believes that the inflation slowdown witnessed over the past year is the most significant since the early 1980s.
Nevertheless, Kugler stressed the importance of further cooling in the US labor market, as well as a decrease in rent and housing costs, to ensure that inflation falls back to pre-pandemic levels.
Kugler believes that as the demand and supply of labor reach a better equilibrium, wage pressures will subside and contribute to restoring inflation to lower levels experienced prior to the pandemic.
“I am pleased with the progress made thus far in mitigating inflation,” stated Kugler. “However, I must emphasize that the Fed’s work is not yet complete.”
To tackle the worst bout of inflation since the early 1980s, the Fed increased interest rates from March 2022 to the summer of 2023. Although higher rates had a negative impact on home sales and manufacturers, the broader US economy has experienced surprising resilience and growth.
Given the robust state of the economy, Fed officials believe they have more flexibility to postpone interest rate cuts for the time being.
