Disinflation in the US has slowed, while "stubborn" inflation in housing and price pressures in other categories could stall progress toward price stability. Federal Reserve Governor Adriana Kugler highlighted these concerns in remarks prepared for a speech in Uruguay on Thursday. Recently, the central bank's Federal Open Market Committee reduced its benchmark lending rate by 25 basis points, following a 50-basis-point cut in September.
Although inflation has made notable strides toward policymakers' 2% target, it continues to remain "somewhat elevated," the committee stated at that time. Kugler remarked that the US has observed considerable disinflation alongside a cooling but still resilient labor market. She noted, "While wage moderation and anchored inflation expectations may allow us to continue making progress on inflation, stubborn housing inflation and high inflation in certain goods and services categories may stall progress in reaching our target." Data from the Bureau of Labor Statistics revealed that US consumer inflation matched Wall Street's projections in October.
Core inflation, excluding the volatile food and energy categories, remained constant at 0.3% sequentially. When analyzed on an annual basis, core inflation settled at 3.3%. Furthermore, the BLS reported an acceleration in producer price growth last month. Stifel's report emphasized that "Inflation continues to run hot with little improvement in core consumer prices since June and an acceleration in producer prices in October.
Coupled with resilient and, in certain instances, robust consumer spending that maintains a steady pace of domestic activity, stubbornly sticky price pressures highlight the necessity for a slow and tempered policy adjustment moving forward." The probability of the FOMC lowering interest rates by 25 basis points next month fell to 72% on Thursday, down from 83% the previous day.
Conversely, the likelihood of rates remaining unchanged increased to 28%. Kugler stated that policymakers must stay attentive to both sides of their mandate amid the cooling labor markets and a "continued but slowing" trend in disinflation. She remarked, "If any risks arise that stall progress or reaccelerate inflation, it would be appropriate to pause our policy rate cuts.
If the labor market slows down suddenly, it would be appropriate to gradually continue reducing the policy rate." Both Dallas Fed President Lorie Logan and St. Louis Fed President Alberto Musalem called for careful consideration in the implementation of rate cuts due to upside risks to inflation. Additionally, Kansas City Fed President Jeff Schmid noted that while the FOMC needs to loosen policy, "it remains to be seen how much further interest rates will decline or where they might eventually settle.".