Fed's Kugler expects rate cuts later this year, relays ‘cautious optimism’

Federal Reserve Gov. Adriana D. Kugler said June 18 it may “become appropriate” for the Fed to begin cutting rates later this year, though it will depend on how the economy fares.

“As I stand here today, inflation remains too high, but I'm certainly encouraged by the overall progress and the trajectory that we have been seeing,” Kugler said at the Peterson Institute for International Economics in Washington. “Recent data on the economy and inflation also gives me cautious optimism that we're on track and making good headway towards the Federal Open Market Committee's inflation goal of 2%.”

Kugler cited several reasons for her optimism, including productivity growth, “which is a source of supply expansion that is … likely to put downward pressure on inflation without actually slowing growth,” she said.

A June 12 report from the Bureau of Labor Statistics showed that the consumer price index rose an annualized 3.3% from May 2023, slightly below expectations, and also below the 3.4% figure recorded in April. Fed Chair Jerome Powell said at a news conference that same day that while he was pleased with the CPI figure, making the decision on whether to cut rates depends on a range of data.

In a unanimous decision, the FOMC held the federal funds rate steady June 12 at a range of 5.25% to 5.5%, keeping interest rates unchanged for the seventh consecutive meeting.

Kugler, a member of the FOMC, said she supported that decision as “we need to see more progress towards 2% inflation before I can be confident that inflation is moving sustainably towards that objective.”

According to data released May 31, the core personal consumption expenditures price index, the Fed's preferred inflation gauge, rose 2.8% year over year in April, matching the pace of March and February.

Kugler pointed out that there are risks associated with cutting rates too early or too late, and the Fed must weigh both sides of its dual mandate: keeping prices stable and achieving maximum employment.

“If the economy evolves as I expect, it will become appropriate to begin easing policy sometime later this year,” Kugler said. “But, as always, my judgment will be guided by the data.”