Fed Governor Kugler: Inflation Risks Remain Elevated, Rate Cuts Likely to Be "Far Off"

Remarks of Officials

Summary:

Federal Reserve Governor Adriana Kugler indicated that the Fed may continue holding the policy rate at its current level "for some time", as inflation continues to face important upside risks. The labor market has largely rebalanced, and wage growth is not a primary driver of inflationary pressures.

On March 7, Kugler delivered a speech in Portugal, highlighting key points:

Productivity gains drive recovery. The United States has experienced a relatively swift economic recovery, with productivity gains playing a crucial role. Unlike European countries that implemented "job retention" policies, the U.S. leveraged its unemployment insurance (UI) system to facilitate labor reallocation to more productive sectors. This approach enhanced overall economic efficiency. Additionally, the flexibility of the U.S. labor market has accelerated the integration of new immigrants into the workforce, further boosting economic growth.

While global inflation rates have declined from their pandemic peaks, certain price pressures remain. In the U.S., housing inflation has eased but remains elevated, and core goods prices have risen since mid-2024. This trend is concerning, as long-term deflation in goods prices has historically offset price increases in other categories, thereby containing overall inflation. There is also considerable uncertainty about the inflationary effects of tariff policies implemented during the Trump administration.

U.S. consumer expectations for inflation over the next year and the next five to ten years have increased from the end of last year. In response, the Federal Reserve decided in January to maintain the federal funds rate target range at 4.25%–4.50%, and may keep it at this level for an extended period to ensure inflation remains under control.

The U.S. labor market has largely returned to equilibrium. In the United States, the V/U ratio ratio went from the all-time high of 2 in early 2022 to 1.1 in January 2025, which is currently below the average observed in 2019, just before the pandemic. Wage growth has moderated in line with productivity gains, helping to contain inflation while ensuring labor market stability. In contrast, slower labor market integration of new immigrants in Europe, due to policy differences, has reduced the downward pressure on wage growth and may contribute to stickier inflation.

Given the lingering upside risks to inflation, the Fed may continue holding the policy rate at its current level "for some time".

Kugler's Speech

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Fed Governor Kugler: Inflation Risks Remain Elevated, Rate Cuts Likely to Be "Far Off"

Risk Disclosure