Kugler Says Fed Has Time to Be Patient Amid Healthy US Economy

The Federal Reserve’s patient approach to monetary policy has been underscored by Governor Mary Kugler, who highlighted the U.S. economy’s resilience in recent speeches. With GDP growth holding steady, inflation cooling, and the labor market near full employment, Kugler emphasized the Fed’s ability to avoid abrupt policy moves. But what does this mean for investors? Let’s break down the data behind the Fed’s confidence—and the risks lurking beneath the surface.

A Fed in No Rush

Kugler’s central argument is that the U.S. economy is operating close to its “maximum employment” threshold, with the unemployment rate at 4.2%—matching estimates of the “natural rate of unemployment” (u*). This stability, combined with inflation moving toward the Fed’s 2% target, means policymakers can afford to wait for clearer signals before tightening or easing further.

The Fed’s current stance—keeping rates at 4.25%-4.50%—reflects this patience. Kugler noted that the economy’s “resilience” gives the Fed time to let inflation subside naturally, rather than risk over-tightening.

The Economic Dashboard: Growth and Inflation

GDP Growth:
The U.S. economy grew 2.5% in 2024, and projections for 2025 hover around 1.9%. While this is a slowdown from recent years, it’s still solid for an economy in a post-pandemic “cooling phase.”

Inflation:
Core PCE—the Fed’s preferred inflation gauge—hit 2.6% in early 2025, down from pandemic-era highs. Kugler pointed to progress in taming goods inflation (which turned negative in 2024) but warned that services inflation remains stubborn.

Labor Market:
Job growth has slowed to 152,000/month in Q1 2025, down from 168,000 in 2024, but the labor market remains robust. Job openings and quits remain elevated, and the unemployment rate hasn’t breached 4.3%—a sign of underlying strength.

Risks on the Horizon

While Kugler’s optimism is grounded in data, two key risks could disrupt the Fed’s patient strategy:

1. Trade Policy Uncertainty:
   Tariffs and geopolitical tensions are clouding business and consumer sentiment. Surveys like the University of Michigan’s consumer sentiment index have dipped amid fears of higher prices.

2. Inflation Persistence:
   If services inflation (e.g., housing, healthcare) fails to cool, the Fed may need to hike rates again. Kugler noted that “asymmetric risks” remain, particularly if supply chain bottlenecks resurface.

What This Means for Investors

The Fed’s patience is a tailwind for markets, as it reduces the threat of abrupt rate hikes. However, investors should remain cautious about sector-specific risks:

• Equities: The S&P 500 has dipped 10% from February 2025 highs, but Kugler’s comments suggest further volatility is likely.
• Bonds: The 10-year Treasury yield remains in a 4.0%-4.5% range, reflecting the Fed’s stance. A cut to 3.13% by early 2027 could boost bond prices.
• Real Estate: Housing starts remain steady at 1.5 million annualized units, but mortgage rates near 6.5% limit upside.

Conclusion: The Fed’s Playbook, and Why It Works

Kugler’s case for patience hinges on three pillars:

1. Labor Market Stability: The 4.2% unemployment rate aligns with u*, signaling no overheating.
2. Inflation Progress: Core PCE is on track to hit 2% by 2027, even if services inflation drags.
3. Growth Resilience: 1.9% GDP growth in 2025 is modest but sustainable, with consumption and services offsetting slower business investment.

While trade risks and inflation uncertainties loom, the Fed’s “wait-and-see” approach minimizes policy errors. For investors, this means sticking with high-quality equities and bonds, while keeping an eye on tariff developments and wage trends. As Kugler put it: “The economy has been resilient so far, which gives us time to make progress on inflation.” That patience, for now, is the right move.