Federal Reserve Governor Adriana Kugler suggests maintaining the current interest rate levels for a prolonged period due to persistent inflation risks and rising inflation expectations.
Kugler, in a prepared speech delivered in Portugal on Friday, emphasized the need for a cautious approach to monetary policy given recent inflationary trends. She highlighted the lack of substantial progress in key inflation categories towards the Fed’s 2% target and the recent surge in inflation expectations as justifications for a sustained rate pause. “Given the recent increase in inflation expectations and the key inflation categories that have not shown progress toward our 2% target, it could be appropriate to continue holding the policy rate at its current level for some time,” Kugler stated.
This statement reinforces Kugler’s previous stance that the Fed still has significant work to do in curbing inflation. She cited concerning data points, including a University of Michigan report indicating consumer inflation expectations reaching a 20-year high of 3.5% over the next five to ten years. Stable inflation expectations are crucial for overall price stability, making this increase a significant concern for policymakers.
The Federal Reserve is widely anticipated to hold interest rates steady at its upcoming meeting on March 18-19. After implementing a full percentage point of rate cuts in the latter half of last year, Kugler and her colleagues have consistently emphasized the need for concrete evidence of cooling inflation before considering further reductions. Kugler noted that inflation has remained relatively stagnant since the second half of 2024, with upward pressure stemming from increases in both non-market-based core services and goods inflation.
Traditionally, goods price deflation has counterbalanced price increases in other sectors, helping to contain overall inflation. However, the current trend of rising goods inflation eliminates this mitigating factor, further fueling inflationary pressures. Kugler also acknowledged the “considerable uncertainty” surrounding the inflationary effects of recent policy changes. Specifically, the fluctuating nature of President Trump’s tariffs on major trading partners presents a challenge in assessing their economic impact.
In a discussion following her speech, Kugler reiterated the importance of monitoring the potential price impacts of these policies before evaluating their broader effects on economic activity. She indicated that the heightened uncertainty is already reflected in data, citing increased inflation expectations and businesses reporting rising input costs. These factors contribute to the complex economic landscape the Fed must navigate in its efforts to achieve price stability. The sustained rate pause advocated by Kugler reflects a prudent approach aimed at mitigating inflationary risks and ensuring the long-term health of the US economy.
