MNI: Fed's Musalem Says Upside Inflation Risks Have Risen
MNI (WASHINGTON) - St. Louis Fed President Alberto Musalem said Wednesday he supports further interest rate cuts if inflation keeps falling, but added the risks that it doesn't have risen even as the labor market stays healthy.
"Further easing toward a neutral policy stance will be appropriate to support employment if inflation continues to converge toward 2%," Musalem said in describing his base case scenario.
However, "recent information suggests to me that the risk of inflation ceasing to converge toward 2%, or moving higher, has risen, while the risk of an unwelcome deterioration in the labor market has remained unchanged or possibly fallen."
"Future adjustments to the policy rate can be accelerated, slowed or paused as appropriate in response to new information about the outlook and risks for the price stability and employment objectives," he said in remarks prepared for the Economic Club of Memphis in Memphis, Tenn.
The Fed has reduced its benchmark fed funds rate by 75 bps this year from a post-Covid high of 5.25%-5.5% and signaled more cuts are coming. However, investors are already shifting gears to expect a higher policy rate after Donald Trump won the presidential election with promises of tax cuts and tariffs. Musalem did not address these proposals in his speech. (See: MNI INTERVIEW: Fed Could Pause As Prices Spike in 2025-Gagnon)
"Easing too much too soon could prompt an increase in demand that initially outpaces supply, further delaying inflation convergence," he said. "Of course, easing too little too late could be associated with an unwelcome deterioration in the
labor market, even as inflation remains on a course toward 2%."
If the recent surge in productivity growth is a structural shift, faster cuts would be appropriate as inflation continues to decline, while the opposite also holds if it turns out the productivity boom is driven by supply side improvements, he noted.
"It is appropriate for monetary policy to remain moderately restrictive while inflation remains above the FOMC’s 2% target," he said.