Federal Reserve Governor Adriana Kugler said it would be appropriate to lower borrowing costs “later this year” if inflation continues to moderate alongside a cooling yet resilient labour market.
Kugler emphasised the need to be data-dependent, especially given the risks to inflation and employment have become much more balanced. Her comments on the rate outlook echo those made in June.
“If economic conditions continue to evolve in this favourable manner with more rapid disinflation, as evidenced in the inflation data of the past three months, and employment softening but remaining resilient as seen in the past few jobs reports, I anticipate that it will be appropriate to begin easing monetary policy later this year,” Kugler said Tuesday in prepared remarks for an event hosted by the National Association for Business Economics in Washington.
She said a rise in unemployment “driven by layoffs” would prompt her to vote for a cut “sooner rather than later.” Similarly, if subsequent reports don’t confirm a sustained easing of inflation pressures, she said “it may be appropriate to hold rates steady for a little longer.”
Fed officials have stepped up their signalling that they are moving closer toward cutting interest rates, though most — including Chair Jerome Powell — have stopped short of offering any guidance on the timing of such a move.
Investors are betting policymakers will lower borrowing costs in September, according to futures markets. Officials are widely expected to hold interest rates at a more than two-decade high when they gather July 30-31.
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US central bankers said in June that they were waiting for “greater confidence” that inflation was decelerating sustainably toward their 2% target before reducing rates. Recent data has shown a renewed easing in price pressures, with a key gauge of consumer prices posting the smallest advance since 2021 in June.
Powell said Monday the more recent readings add “somewhat” to confidence. In comments the same day, San Francisco Fed President Mary Daly, a voting member of the policy committee this year, said confidence is growing that inflation is “getting nearer” a sustainable pace toward 2%.
At the same time, officials are also stressing the importance of landing inflation without steep losses in the job market. Kugler, in a moderated discussion following her remarks, said the maximum employment side of the Fed’s mandate “has become so much more relevant.” She added that Fed officials are watching the data “incredibly closely” for risks of a weakening economy.
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The labour market is showing signs of cooling. While job growth remains solid, the unemployment rate has gradually climbed. Kugler said there has been a “substantial rebalancing” in the labour market, pointing to a decline in vacancies and an expanded labour force.
“This continued rebalancing suggests that inflation will continue to move down toward our 2% target,” she said.
Economic Measurement
Kugler’s speech primarily focused on challenges facing economic measurement, including declining response rates to government surveys and incomplete measurement of the service economy. She noted that the central bank is taking advantage of the “explosion” in private sector data, ranging from restaurant reservations to credit and debit card transaction data.
The Bureau of Labor Statistics recently said it will reduce the sample size of the household survey in the monthly jobs report, which informs statistics like the unemployment rate, next year due to budget constraints. BLS Commissioner Erika McEntarfer noted there’s a “real risk” of a decline in quality, especially as response rates have declined substantially in recent years.
Kugler, who took office in September 2023, previously served as the World Bank Group’s US executive director and the Department of Labor’s chief economist.
