Federal Reserve Governor’s Remarks on Tariffs and Inflation

(Reuters) – Federal Reserve Governor Adriana Kugler stated on Tuesday that due to unexpectedly large U.S. import tariffs likely increasing prices, the central bank should maintain current short-term borrowing costs until inflation risks diminish.

Kugler emphasized her careful observation of how the Trump administration’s trade, immigration, fiscal policy, and regulatory changes influence inflation and the labor market, noting that the “significantly larger” than anticipated tariffs captured her focus.

> “I am also monitoring any risks to the outlook, especially upside risks on inflation or downside risks to employment,” Kugler remarked in statements prepared for the Heller-Hurwicz Economics Institute at the University of Minnesota.

She indicated that Fed policy is “well positioned” to adjust in response to economic changes. “Thus, I will support maintaining the current policy rate for as long as these upside risks to inflation continue, while economic activity and employment remain stable.”

The Fed is set to meet in two weeks to contemplate policy changes, with indications to keep the policy rate at 4.25%-4.50% while awaiting further clarity on the tariffs and their anticipated economic impact.

Kugler noted that the U.S. economy likely experienced a slowdown in the first quarter, influenced by some “front-loading” of purchases as households and businesses aimed to get ahead of the impending tariffs.

She also highlighted concerns over recent financial market volatility. “If financial conditions were to tighten persistently, that could weigh on growth in the future.”

The labor market remains solid and balanced, though Kugler acknowledged slow progress on inflation, which continues to exceed the Fed’s 2% target. She noted a rise in short-term inflation expectations but emphasized that longer-term expectations stay anchored, adding, “And I hope they continue in that way.”

In light of the high uncertainty, Kugler stressed the need for the Fed to monitor real-time data closely to identify economic changes swiftly, as any interest rate adjustments take time to affect actual conditions.