Fed Governor Kugler: Inflation Faces Upside Risks; Policy Rate to Remain on Hold

Remarks of Officials

Summary:

Federal Reserve Governor Adriana Kugler indicated that upside risks to inflation persist, and the Federal Reserve should maintain the federal funds rate target range at the current level of 4.25% to 4.50%. The Fed is currently exerting moderate restraint on the economy and persistently elevated inflation.

The overall picture is that the U.S. economy remains on a firm footing, with output growing at a solid pace. Real gross domestic product grew 2.5 percent in 2024. Consumer spending continued to drive this solid pace last year. While retail sales posted a decline last month, January data are often difficult to interpret. Bad weather and seasonal adjustment difficulties may have affected the release, and it should be noted the slowdown came after a strong pace of sales in the second half of last year.

Inflation has fallen significantly since its peak in the middle of 2022, though the path continues to be bumpy and inflation remains somewhat elevated. Readings last week from the BLS showed price pressures persisted in the economy in January. Based on the consumer price index and producer price index data for January, it is estimated that the PCE index advanced about 2.4 percent on a 12-month basis in January. Excluding food and energy costs, core prices are estimated to have risen 2.6 percent. Those readings show there is still some way to go before achieving the FOMC's 2 percent objective.

Employment readings show that the labor market is healthy and stable. Payroll job gains have been solid recently, averaging 189,000 per month over the past four months, according to the Bureau of Labor Statistics (BLS). After touching 4.2 percent as recently as November, the unemployment rate has flattened to 4 percent since then, consistent with a labor market that is neither weakening nor showing signs of overheating.

Governor Kugler noted that while downside risks to employment have diminished, upside risks to inflation remain. Additionally, the potential net effects of new economic policies are still highly uncertain. Therefore, it is appropriate for the Federal Reserve to maintain the federal funds rate target range at 4.25% to 4.50%.

Overall, the net impact of new economic policies remains uncertain, and the future path of interest rates will depend on specific developments. Given the current balance of risks, it is appropriate to keep the federal funds rate unchanged for a period of time.

Fed Governor Kugler

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Fed Governor Kugler: Inflation Faces Upside Risks; Policy Rate to Remain on Hold

Risk Disclosure