Federal Reserve (Fed) Board of Governors member Adriana Kugler delivered a speech at the Peterson Institute for International Economics on Tuesday, noting that while inflation remains too high, recent inflation data has been encouraging. Fed Governor Kugler also made a point of cautioning that progress to inflation targets may be gradual.
Key highlights
Monetary policy is sufficiently restrictive, economic conditions are moving in the right direction.
It is likely appropriate to begin easing policy sometimes later this year if economy evolves as expected.
I am optimistic on productivity growth, with surge in new businesses, and AI likely to diffuse quickly.
Preponderance of labor market data show supply, demand coming into better balance.
Most indicators point to a slow, steady easing in labor market.
If wage growth continues to moderate, will soon be at levels consistent with price stability.
I am optimistic that improving supply, and cooling demand will support continued disinflation.
Further progress on inflation likely to be gradual.
Policy has more work to do, judgment will be guided by data.
I am watching closely for any signs of labor market deterioration.
Inflation is too high, but I am encouraged by the renewed recent progress & trajectory.
I expect some cooling of economic activity to continue.
Additional Kugler comments
We have seen an increase in delinquencies indicating that households are being stretched.
Retail sales indicate that economic activity may be cooling.
How much we cut will be a question we continue to assess as more data comes in.
When asked why not cut at next meeting: There are risks on both sides of the mandate.
We certainly need to be convinced that we are not going to put in danger all the great progress made on inflation.
In contrast to rest of the world, there has been quite a bit of resiliency in the US economy.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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