By Howard Schneider
WASHINGTON (Reuters) -Federal Reserve Governor Adriana Kugler said on Wednesday she is “optimistic” that inflation will continue to decline, laying out the case for why some of the economy’s more persistent price pressures will abate.
In her first policy speech since joining the Fed’s governing board in September, Kugler held close to the topline views laid out by the central bank after its meeting last week — that slowing inflation could clear the way for interest rate cuts this year, but only after policymakers develop more “confidence” inflation will continue to slow.
“I will remain focused on the inflation side of our dual mandate until I am confident that inflation is returning durably to our 2% target,” Kugler said at a Brookings Institution event.
“The…job is not done yet,” she said, with December inflation still at 2.6% as measured by the Fed’s preferred Personal Consumption Expenditures price index.
Even so, Kugler, the newest member of the Fed’s governing board, said that given the flow of data, from March, every policy meeting will be “live” for the potential start of rate cuts, though she deferred from saying when she thought an initial reduction would come.
“March, May, June — every meeting from now until the end of the year and moving forward will be live,” she said.
However, Fed Chair Jerome Powell at a press conference following last week’s policy meeting said it was unlikely policymakers would develop the needed confidence around falling inflation to cut the policy interest rate in March.
Kugler did note that conflicts in Ukraine and the Middle East, with risks also posed to global shipping, did create potential new price pressures for an array of goods, whose price declines have helped slow the U.S.’s fastest inflation pace since the 1980s. But Kugler, an economist and a former U.S. Labor Department official, gave her most detailed attention to why she feels the pace of price increases will continue to fall.
Wage growth is likely to continue to moderate as hiring and the available pool of labor continue to move into better balance, she said, a conclusion she felt would hold despite recent strong job reports, including January’s addition of 353,000 payroll positions, roughly twice the pre-pandemic average.
Inflation expectations were anchored, Kugler said, but as notable recent staff research suggests, business price-setting practices are beginning to look more like they did before the pandemic caused the pace of price adjustment to accelerate.
Before the pandemic prices once set by business tended to stay stable for more than 10 months, she said, “but by early 2022 the median price was lasting less than five months.”
The most recent data shows the pace now back near seven months.
“There are some signs that businesses may be more wary of the response by consumers to higher prices and may already be responding by raising prices less frequently,” Kugler said.
That combination of forces may be of particular help in lowering inflation across wage-intensive service businesses that have accounted for much of the recent run-up in overall prices.
“I am pleased by the progress on inflation and optimistic it will continue,” Kugler said.
If progress does stall, she said, the policy interest rate may have to be held “at its current level for longer.”
Many analysts expect an initial reduction at the central bank’s May meeting.
