On Friday, Federal Reserve Governor Adriana Kugler said the U.S. economy can achieve a "soft landing" of lowering inflation and a healthy labor market since inflation expectations are stable and the Fed has avoided a wage-price spiral.
"I am cautiously optimistic that we will see continued progress on disinflation without significant deterioration of the labor market," Kugler told the Stanford Institute for Economic Policy Research Institute's annual economic summit.
Kugler did not specify when or how fast the Fed should decrease its policy rate, which it rapidly raised in 2022-2023 and has held at 5.25% to 5.5% since July.
She said she's optimistic since Fed interest rate hikes and the reversal of supply shocks that caused inflation have alleviated pricing pressures swiftly even though the labor market is strong.
She said post-pandemic inflation rose due to sharp and rapid limits on products and labor, which businesses couldn't adapt to. As worker and commodities supply increased last year, it dropped nearly as fast. She added that pay growth stalled, perhaps preventing a wage-price spiral that could have fueled inflation. As firms adjust prices less regularly than during the inflation boom, inflation expectations have remained anchored, she said, indicating declining inflation.
The U.S. unemployment rate is only a few tenths higher than when the Fed raised rates in March 2022, at 3.7%. Most recently, the Fed's targeted inflation rate—the annual change in the personal consumption expenditures price index—was 2.4%, down 4.5 percentage points.
"We have seen inflation cool significantly, falling more rapidly than at any time since the 1980s," added Kugler. "Yet unemployment remains near the lowest levels seen only a few times since the 1960s."
Kugler said the Fed's work continues. She said "we are laser focused" on lowering inflation to 2%, the Fed's aim.
Follow for more updates