A shopper buys food at a supermarket ahead of the Thanksgiving holiday in Chicago, Illinois, U.S. November 22, 2022. REUTERS/Jim Vondruska/File Photo

By Ann Saphir and Michael S. Derby

(Reuters) - A pair of Federal Reserve policymakers signaled on Thursday that they believe higher inflation is for now a more pressing risk than a slowing labor market, a view that implies support for keeping monetary policy on hold for longer.

"I see greater upside risks to inflation at this juncture and potential downside risks to employment and output growth down the road, and this leads me to continue to support maintaining the FOMC’s policy rate at its current setting if upside risks to inflation remain," Fed Governor Adriana Kugler told the Economic Club of New York on Thursday. Tariffs are already pushing up on prices, she said, and while there are some signs the economy is cooling it is "not yet a significant slowdown."

Speaking a little later in the day, Kansas City Fed President Jeff Schmid expressed optimism that the economy will skirt recession as it has in the recent past. While the extent of the tariffs' drag on growth and employment is unclear, he too showed he is more worried about the imminent impact on inflation.

"The tariffs are likely to push up prices" by an unknown amount in coming months, Schmid said, and the effect "likely will not be fully apparent for some time."

Upcoming economic data may ratify that view. The Labor Department's closely watched employment report on Friday is expected to show the unemployment rate in May holding steady at 4.2% for a third straight month, and a net gain of 130,000 jobs, smaller than April's 177,000 increase but well above the 100,000 or so seen as indicative of a healthy labor market.

Meanwhile, the consumer price index for May, to be reported next Wednesday, is expected to show inflation re-accelerated as the effect of sweeping import duties - only some of which have been put on hold - show up in pricier goods and services. Inflation has been cooling; by the Fed's targeted measure of the yearly gain in the Personal Consumption Expenditures price index, inflation was 2.1% in April, just a hair above the Fed's 2% target.

The remarks from Kugler and Schmid are among the last from Fed policymakers as they head into a communications blackout period in the runup to their June 17-18 meeting, at which they are widely expected to leave the policy rate in its current 4.25%-4.50% range.

But they are not necessarily representative of all Fed policymakers. Fed Governor Christopher Waller for instance has said he is inclined to "look through" tariff-driven price increases and start delivering rate cuts in the second half of the year should the labor market need support.

Still others have framed inflation risks as roughly equal to the risk that the labor market will weaken, with Fed Chair Jerome Powell saying that solid job growth and recent low inflation readings give the Fed room to be patient to see how it plays out.

Philadelphia Fed President Patrick Harker, who will retire at month's end, appears aligned with that perspective.

"America's economy remains resilient," Harker said on Thursday. "I do not see any dangerous cracks in the foundation. But there are stressors on this foundation."

With all the uncertainty over trade and other policy, he said, "we have to wait and see" how the economy performs before a decision can be made on changing monetary policy. "Only time can provide the necessary clarity," he noted.

"It is entirely possible that the (Federal Open Market) Committee will be facing both upward pressures on prices and rising unemployment," he said.

Schmid and Kugler also nodded to the possibility that the Fed could face threats to both mandates - maintaining price stability and full employment - but both focused more of their concern on the potential that rising prices could lead to persistently higher inflation.

Kugler also said she's paying attention to the potential inflationary effect of other Trump policies, including immigration restrictions and a tax-cut bill that non-partisan analysts estimate will add at least $2.4 trillion to the nation's $36.2 trillion debt.

A decline in net immigration, Kugler said, will likely tighten the labor market in certain sectors like construction and agriculture, and while so far any upward push on wages is not evident, the impacts may become visible later this year or in early 2026.

(Reporting by Ann Saphir, Michael S. Derby, Dan Burns; Editing by Chizu Nomiyama and Andrea Ricci)