Fed's Kugler: I see greater upside risks to inflation and downside risks to employment

Federal Reserve (Fed) Board of Governor member Adrianna Kugler noted on Thursday that although growth remains firm (albeit subdued) and Fed policy appears to be holding at a moderate level, key risks are growing, specifically in regards to inflation and a growing bubble of layoff intentions from businesses and firms.

Key highlights

I see greater upside risks to inflation and potential downside risks to employment and output growth.

Labor market appears resilient and stable.

Economic activity continues to grow but at a more moderate pace than second half of 2024.

Trade and other policy changes may raise jobless rate, push employment away from Fed's objective.

Front-loading of imports makes judging current strength of economy difficult.

April spending and income data point to slight moderation in activity.

Notices of layoffs have ticked up since start of year, as have layoff mentions in Beige Book.

View current Fed policy as moderately restrictive.

Core services inflation still above pre-pandemic rate. Progress on core goods inflation has reversed.

Expects reversal of imports surge in coming months to signal larger price increases.

I still see stability in measures of longer-run inflation expectations.

Nontraditional indicators suggest the economy might be starting to slow.

Nontraditional data are consistent with my assessment we might be seeing some moderation in growth but not yet a significant slowdown.

Inflation is a bigger risk right now than weaker employment.

We haven't seen the full extent of impact of tariffs on prices.

Inflation will be the first-order effect, other effects will be down the road.

Pandemic inflation experience is still affecting expectations.

It's not clear that inflation effects from tariffs will be one-time.

My focus now is on inflation.

Once tariffs are fully implemented, we can start talking about other effects, but that hasn't happened yet.

Declining net inflows of immigrants might make the labor market tighter.

I could start seeing some of those impacts in some sectors by the end of this year.

I expect to start seeing effects in construction, agriculture, leisure & hospitality, health and food processing.

It's premature to expect big job losses from AI.Overall tax bill more stimulative than contractionary.

Unemployment is still at historically very low rate.

One way a rising deficit might affect the Fed is that it could raise the neutral rate of interest.

The majority of Fed officials worried about inflation before growth.

Also debt and deficit will affect yields in bond market, if things become more permanent and affect financing conditions we would pay more attention.

Fed rate now is between moderately and modestly restrictive.

Given tariffs we should be holding it where it is.

Bond market activity has remained orderly.