MNI: Fed’s Musalem Supported 50BP Cut, Sees Gradual Cuts Ahead
St. Louis Fed president says he expects gradual rate cuts but officials must be ready for different scenarios.
The Federal Reserve will likely need to keep cutting interest rates gradually toward a neutral level barring unexpected surprises on employment or inflation, St. Louis Fed President Alberto Musalem said Monday.
“I believe it will likely be appropriate to further reduce the target range for the federal funds rate over time toward a neutral posture, with the size and timing of reductions depending on incoming data, the evolving outlook and the forward-looking balance of risks around this outlook,” Musalem said in prepared remarks to the Money Marketeers in New York.
“In recent months, the risks that inflation would become stuck above 2% or rise have diminished somewhat, while the risk of an unwelcome deterioration in the labor market has increased. At present, I see those risks as roughly balanced,” he said.
"Neither risk seems especially high, but we should be mindful of alternative scenarios that could play out and think about how to respond to them," he said. "I believe that further gradual reductions in the policy rate will likely be appropriate over time." (See MNI INTERVIEW: Fed Can Cut Gradually If Jobs Stay Strong-Kohn)
Musalem expects U.S. economic growth will remain strong with a healthy labor market while inflation converges back to the central bank’s 2% target.
CLOSE TO EQUILIBRIUM
Musalem said his September FOMC forecast was a bit higher than the median "because monetary policy was and remains moderately restrictive for an economy that appears close to equilibrium with respect to inflation and employment."
If inflation stays above target, perhaps because the economy is powered by lowered rates or as uncertainty around the election lifts, then the Fed could respond by slowing or stopping hikes, he said.
"Should such a scenario arise, with demand increasing at a faster pace than supply, it would be appropriate to maintain a restrictive policy stance with fewer, if any, reductions in the policy rate until such time as inflation does continue to converge," he said.
In contrast, if unemployment spikes unexpectedly, it would be appropriate for the Fed to ease more quickly, he said.