Fed Governor Kugler discusses inflation expectations and monetary policy

Investing.com -- Federal Reserve Governor Adriana Kugler recently spoke about inflation expectations and monetary policy at an event co-hosted by the Griswold Center for Economic Policy Studies and the Julis-Rabinowitz Center for Public Policy and Finance at Princeton University. She highlighted the crucial role inflation expectations have played since spring 2022 and the importance they will have in the Federal Reserve’s ongoing effort to achieve sustained inflation of 2%.

Governor Kugler explained inflation expectations within the framework of the Phillips curve, a concept that connects inflation to broader economic activity. She also discussed the stability of these expectations, known as the "anchoring" of inflation expectations, and how firms and households form their inflation expectations and how these expectations affect their economic decision-making.

Governor Kugler highlighted the connection between inflation and overall macroeconomic conditions, and the role of inflation expectations in this relationship. She emphasized the importance of the stability of these expectations, which are critical in the Federal Reserve’s ongoing effort to achieve sustained inflation of 2 percent.

Different measures of inflation expectations exist, some from surveys polling business owners, others asking consumers, and yet others estimating expectations among bond investors based on the differences in yields between nominal and inflation-indexed securities. Governor Kugler shared that she closely monitors these surveys as they complement market-based indicators of future inflation.

She also discussed the important role of the Federal Reserve in convincing the public about its intention to shape economic conditions and to use its policy tools to bring inflation to its target. The Fed’s credibility in keeping inflation low and stable, won over decades, kept longer-term inflation expectations stable, and that contributed significantly to the Fed’s success in reducing inflation while keeping the labor market strong.

Governor Kugler observed that both short- and long-term inflation expectations are often notably higher than actual inflation, even after a period of very low inflation. She also noted that there is a wide dispersion of views about both shorter and longer-term inflation expectations, reflecting the dispersion of inflation in the consumer baskets of goods and services purchased by different people.

In terms of recent developments in inflation expectations, Governor Kugler mentioned that several measures of inflation expectations have increased in recent months, with both consumers and businesses reporting new and proposed tariffs as an important reason.

In conclusion, Governor Kugler strongly supported the FOMC’s decision at their March meeting to maintain the target range for the federal funds rate at 4.25% to 4.5%. She will support maintaining the current policy rate for as long as these upside risks to inflation continue, while economic activity and employment remain stable.

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