FED: Kugler: Appropriate To Hold Rates As Inflation Likely To Accelerate

Gov Kugler continues to sound very patient on the next rate easing in a speech today - we have her penciled in as one of the 7 FOMC members who don't see any rate cuts this year. In short, she remains concerned about the incoming inflation impact from tariffs, and elevated short-run inflation expectations. Keep in mind she'll almost certainly be replaced in January when her term as governor expires.

• On her view that rates should be on hold "for some time": "Inflation.. remains above the FOMC's 2 percent goal and is facing upward pressure from implemented tariffs. Moreover, I judge that inflation is likely to increase further as tariff effects build up during the rest of the year...Given the stability in the employment side of our mandate, with the unemployment rate still at historically low levels, elevated short-run inflation expectations, and goods inflation rising due to the upward pressure from tariffs, I find it appropriate to hold our policy rate at the current level for some time. This still-restrictive policy stance is important to keep longer-run inflation expectations anchored. "
• She also highlights signs of tariff passthrough in this week's CPI and PPI reports (see MNI's Inflation Insight on this topic), and in her speech offers several reasons to expect "that larger effects of tariffs are still coming": "I see firmer core goods inflation as already partially reflecting the pass-through of increased tariffs, which has been shown by research done at the Fed.18 In addition, CPI and PPI reports released in the past two days show that increases in core goods prices were more broad-based in the month of June."
• Re the reasons to expect future price increases: "While many forecasters may have been expecting a sooner and sharper increase in overall inflation, there are many reasons to think that larger effects of tariffs are still coming. First, businesses built up inventories ahead of anticipated tariff increases, giving them leeway to still sell goods at pre-tariffed prices. Second, given the many changes in implemented tariff policies, businesses may not yet be passing the higher tariffs to their selling prices because they are waiting for greater clarity. Third, businesses, especially larger ones, may also be waiting to capture market share from others that hike prices sooner. Fourth, the current environment of still-elevated short-run inflation expectations makes it easier for workers to seek higher wages and business to charge higher prices, which could increase the persistence of price hikes going forward. Fifth, tariff rates could increase further, as seen in newly proposed reciprocal tariffs for several countries and the new tariffs on copper introduced last week, putting further upward pressure on prices."