Fed's Kugler Sees Inflation Progress But Warns: 'Policy Is Not On A Preset Course'

Federal Reserve Governor Adriana Kugler said on Tuesday that inflation “appears to be on a sustainable path” but indicated that challenges still persist, adding that monetary “policy is not on a preset course.”

Speaking at the Detroit Economic Club, Kugler described recent inflation readings as encouraging. Personal consumption expenditures rose 2.3% over the past year, and core PCE—the Fed’s favorite inflation gauge—increased 2.8%.

“I am encouraged that inflation expectations appear to remain well anchored,” she said.

“I viewed the elevated inflation readings as partly stemming from seasonal and one-off factors not fully accounted for in the data,” she added.

Kugler highlighted the Fed's recent interest rate cuts in September and November as steps toward a more neutral monetary policy stance.

Labor Market Shows Signs Of Cooling, Yet Hurricanes And Strikes Disrupt Statistics

Kugler said monthly payroll gains have slowed, from an average of 260,000 in the first quarter to below 200,000 by midyear.

The unemployment rate has risen from 3.7% in January to 4.1% in October, which she described as “near the level I judge as roughly consistent with our maximum-employment mandate.”

Disruptions in October's employment report, including hurricanes and strikes, accounted for 100,000 to 120,000 missing jobs, with a rebound expected in the months ahead.

“Will see some bounce back,” she said in response to a question about the upcoming November jobs report, set to be released this Friday

Economic Growth, Low Inflation Fueled By Productivity Gains

Kugler said 2024 economic growth has outpaced expectations, with GDP growth nearly doubling earlier forecasts. She attributed this to two key supply-side factors: a surge in immigration earlier in the year and higher productivity growth.

Revisions in September revealed that productivity growth since 2020 has averaged 1.9% annually, compared to 1.4% in the five years prior.

“Emerging technologies, most notably artificial intelligence, may also be starting to contribute to enhanced productivity,” she said.

Kugler highlighted this significant development, saying it boosts the economy's capacity for growth without overheating.

“My speculation was that higher productivity was a possible explanation for the unusual combination of strong economic output, a cooling labor market, and declining inflation,” she added.

Outlook: Risks And Flexibility

Kugler said she will continue to assess incoming data to determine the appropriate policy course, emphasizing that the Fed's decisions are not on a preset path.

She said the Fed remains vigilant for potential risks, including slowing immigration, trade policy changes, and negative supply shocks that could impact economic growth and inflation.

Market Reactions

Interest rate futures saw little movement after Kugler’s remarks, with market-implied odds showing a 74% probability of a 25-basis-point rate cut at the Fed’s Dec. 18 meeting, as per the CME FedWatch tool.

The U.S. Dollar Index—as tracked by the Invesco DB USD Index Bullish Fund ETF (NYSE:UUP)—slightly weakened, extending session losses to negative 0.3%.

Large-cap U.S. stocks remained broadly flat for the day, with the S&P 500 ETF Trust (NYSE:SPY) hovering at $603.30.

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