Federal Reserve Board Gov. Adriana Kugler defended the Fed's recent rate cuts as appropriate steps toward a more neutral policy stance, given what she described as currently "solid economic conditions."
"I see the Fed's dual-mandate goals of maximum employment and price stability as being roughly in balance," she said. "I will vigilantly monitor for incoming risks or negative supply shocks that may undo the progress that we have achieved in reducing inflation."
Kugler's remarks — delivered to a crowd at the Detroit Economic Club — characterized the American economy in 2024 as having surprising economic resilience, driven by two "positive supply shocks": immigration-fueled labor force growth and a surge in productivity.
Kugler said immigration has played a leading role in fueling labor force growth, citing a Congressional Budget Office report that revised population estimates, revealing 6 million more immigrants in the country that had not been previously accounted for.
Kugler likened this dynamic to the late 1990s, when mismeasured immigration similarly disguised true labor force estimates. This influx mitigated labor shortages in key sectors and contributed to economic stability.
"That information was consistent with my hypothesis that the strength in the economy was in part due to a larger-than-estimated labor force," she said. "The increase of workers was a positive shock and is notable because the underlying demographics of the U.S. heading into the pandemic were consistent with a slow-growing population and lower labor force participation, and that dynamic got worse as the pandemic generated excess retirements and a fall in immigration."
The second positive supply shock, according to Kugler, came from the fact that American workers have been especially productive in recent years.
Revised data revealed a 1.9% annual productivity growth rate since 2020, compared with 1.4% in the five years before the COVID-19 pandemic.
"This is a hugely important development because it increases the productive capacity of the economy and allows more rapid economic growth without overheating," she said. "What's more, revisions resulted in much better-aligned GDP and [gross domestic income] measures, and the two measures now also had much more aligned implications for productivity."
The labor market as a whole remains solid and inflation appears to be on a sustainable path to the Fed's 2% goal, Kugler said. Many had forecast a deceleration in growth — the Blue Chip Economic Indicators in December 2023 predicted 1.3% GDP growth this year — and more recent estimates show the economy is on track to grow at almost twice that rate this year, she said.
While inflation moderated significantly — potentially faster than economists' predictions, she said — Kugler cautioned against overinterpreting short-term data fluctuations. She also warned the audience to focus on broader trends.
"Progress in the fight against inflation has to be judged from trends, not from a data release or two," she said.
Inflation initially reaccelerated in early 2024 but soon settled into monthly increases below 0.2%. Kugler attributed the stability to a cooling labor market, which slowed wage growth and eased pressure on prices. She remains vigilant, however, noting that sectors like housing services still showed elevated inflation.
Kugler observed a labor market that has gradually cooled throughout the year. Payroll gains, which averaged 260,000 in the first quarter, slowed to under 200,000 by the second. The unemployment rate edged higher, stabilizing at 4.1%. Despite these changes, Kugler maintained a measured perspective.
"The unemployment rate is near the level I judge as roughly consistent with our maximum-employment mandate," she said, stressing the importance of closely monitoring labor force participation and economic activity, which has remained strong despite the cooling job market.
Kugler acknowledged that trade policy in the next administration loomed as a potential disruptor of productivity and prices, but she said it is still too early to make judgments as the incoming administration has not yet enacted policies.
"Studying the specifics, when [the policies] come out, will be important, as trade policy may affect productivity and prices," she said. "I will make assessments about what the net effects of any policy changes will be on prices or employment and how the balance between the two legs of our mandate will be affected."
