Federal Reserve Governor Adriana Kugler anticipates a series of interest rate cuts in the future due to gradually declining inflation and a cooling labor market. She believes that while the U.S. economy remains resilient, its growth is slowing, and the Federal Reserve does not wish to further weaken the economy.
In her speech at the Mossavar-Rahmani Center for Business and Government at Harvard University's Kennedy School of Government, Kugler stated: "Future actions will depend on the inflation, employment, and economic activity data we receive. If these conditions continue to evolve in the current direction, then further rate cuts are appropriate."
As a voting member of the Federal Open Market Committee (FOMC), Kugler has served on the Federal Reserve Board since September 2023. She emphasized her strong support for the FOMC's decision on September 18th to lower the federal funds target rate by 50 basis points to a range between 4.75% and 5.0%.
Kugler noted that the recent decline in inflation, like the rise during the COVID-19 pandemic, occurred in stages. "Overall, commodity price inflation soared first in 2020 and 2021, followed by service prices excluding housing, and finally housing prices, with some overlap between stages," she added. "The process of inflation decline, however, is happening in reverse."
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The most challenging part of current inflation is related to housing costs. In the July Personal Consumption Expenditures Price Index (the Federal Reserve's preferred inflation indicator), housing prices rose by 5.3% year-over-year, while the overall index only increased by 2.5%. Since rental contracts are typically renewed only once a year and house sales are even less frequent, housing prices belong to a category that changes more slowly.
Kugler stated: "The decline in new rent increases is the main reason I expect further moderation in the cost of housing services."
A modest adjustment in the labor market has also slowed wage growth, helping to ease inflation in other service prices. She pointed out that the pace of hiring has slowed this year, and the unemployment rate has risen. However, this change is mainly due to an increase in labor supply, rather than layoffs or other job losses. Kugler also noted that immigration has added millions of working-age people to the U.S. economy, and some people who left the labor market during the pandemic are gradually returning to work.
She said: "In the past few years, labor demand has exceeded supply, but as the economy has moderated due to tighter monetary policy, the labor market has regained balance."
Kugler believes that although consumer spending and economic activity remain "robust," she expects future growth to slow due to the pressure of tighter monetary policy on interest-sensitive spending such as housing, automobiles, and durable goods.
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