In a speech overnight, Fed Governor Adriana Kugler said she’s satisfied with the disinflationary progress, and expects it to “continue”. However, she was quick to temper this optimism with a note of caution, emphasizing that Fed’s work in combating inflation is far from over. The unpredictability of consumer behavior stands as a reminder of unforeseen developments to “slow progress on inflation.”

Kugler also pointed to the recent employment report, which showed unexpected strength. While a strong labor market is generally a positive sign, in the context of Fed’s efforts to cool inflation, such robustness could complicate the path to achieving a balanced demand-supply equation in both product and labor markets.

Fed Governor underscored the importance of monitoring geopolitical risks, particularly highlighting how the ongoing conflict in Ukraine and tensions in the Middle East could exacerbate inflationary pressures through “higher commodity prices” and global trade “disruptions”, “in turn pushing up goods inflation in the US”.

“At some point, the continued cooling of inflation and labor markets may make it appropriate to reduce the target range for the federal funds rate,” she noted. Conversely, “if progress on disinflation stalls, it may be appropriate to hold the target range steady at its current level for longer to ensure continued progress on our dual mandate.”

Full speech of Fed’s Kugler here.

Minneapolis Fed President Neel Kashkari offered a more conservative outlook on policy loosening compared to market expectations. In a conversation with CNBC today, Kashkari indicated his anticipation of only two or three interest rate cuts throughout 2024, a stance that contrasts sharply with the more aggressive predictions circulating in financial markets, where fed fund futures suggest the possibility of up to five quarter-point cuts before year-end.

“Sitting here today, I would say, two or three cuts would seem to be appropriate for me right now,” Kashkari remarked, emphasizing a cautious approach rooted in current economic data.

Kashkari’s comments highlight the central role of inflation data in shaping Fed’s policy decisions. With recent data trends being “resoundingly positive,” the path forward for rate adjustments hinges on continued favorable inflation reports.

“And then the question will simply be, at what pace do we then start to adjust rates back down?” he added.

Moreover, Kashkari introduced the notion of a potentially prolonged environment of elevated interest rates, suggesting that current economic conditions might necessitate higher rates for an extended period. “There are compelling arguments to suggest we could be in a longer, higher rate environment going forward,” he remarked.

Philadelphia Fed President Patrick Harker’s speech overnight delivered a dose of cautious optimism regarding US economy’s trajectory, suggesting that a “soft landing” could be within reach.

Harker highlighted key indicators supporting his positive outlook: a trend towards disinflation, a labor market moving towards equilibrium, and sustained consumer spending.

These factors, according to Harker, are crucial for achieving the much-discussed soft landing, a scenario where inflation is controlled without causing a recession.

Emphasizing the progress made thus far, Harker also cautioned that the journey is not yet complete, likening the current economic phase to an airplane’s final approach but not yet landing.

“Now certainly we haven’t touched down, and we’re going to have to keep our seatbelts on, but with inflation continuing to fall back to our 2% target, with employment remaining strong, and with consumer sentiment looking up, the runway at our destination is in sight,” he elaborated.

Minneapolis Fed President Neel Kashkari acknowledged the strides made towards controlling inflation, yet emphasizing the journey towards 2% inflation target is ongoing.

During an event, Kashkari highlighted, “We’re not all the way there yet, but we’ve made a lot of progress on inflation.”

Kashkari pointed to recent inflation data as a sign of encouraging trends, noting that both three- and six-month inflation measures are aligning closely with Fed’s target. “The six-month data is basically there and the three-month data is basically there,” he observed, indicating that if current patterns persist, Fed is on a track to achieving its inflation objective.

However, Kashkari remains cautiously optimistic, refraining from declaring an outright victory over inflation. “I don’t want to say we’re necessarily going to just glide past all the way to 2% but fingers crossed, the data is looking positive.”

Cleveland Fed President Loretta Mester underscored the importance of a cautious approach towards adjusting interest rates during an event overnight. Highlighting the necessity of “risk management,” Mester articulated concerns over reducing rates “too soon or too quickly,” emphasizing the need for concrete evidence that inflation is on a definitive downturn towards Fed’s 2% target.

Mester’s remarks signal a careful balancing act for the Federal Reserve, which is contemplating when to initiate an easing cycle. “It would be a mistake to move rates down too soon or too quickly without sufficient evidence that inflation was on a sustainable and timely path back to 2%,” she stated.

Looking ahead, Mester expressed optimism that the Fed could start to consider easing “later this year,” provided that the economy continues to align with current expectations. This shift in policy, however, would likely occur at a gradual pace to ensure the Fed’s dual mandate goals of price stability and maximum employment are met without inadvertently reigniting inflationary pressures or unsettling inflation expectations.

“The FOMC’s job now is to ensure that the economy reaches an even better place by calibrating monetary policy to achieve our dual mandate goals,” Mester emphasized, “Risk management will take center stage.”

Minneapolis Fed President Neel Kashkari argued in an essay that Fed’s current monetary policy stance “may not be as tight as we would have assumed”. This would afford Fed valuable leeway to sift through incoming economic data before deciding on any reduction to the federal funds rate. More importantly, that’s “with less risk that too-tight policy is going to derail the economic recovery”.

Kashkari pointed out a dual phenomenon observed since September: Swift decline in inflation rates alongside a “remarkably resilient” economic growth, which even accelerated in the latter half of 2023. This trend challenges the conventional expectation that tight monetary policy, aimed at curbing inflation, would necessarily result in weakened economic growth and labor market conditions, including spikes in unemployment.

“But that is not what we have experienced in recent quarters,” Kashkari observed.

He suggests that the decrease in inflation may be largely attributed to improvements on the supply side, which have enhanced production capabilities and helped realign supply and demand, thus mitigating inflationary pressures.

Full essay of Fed Kashkari here.