MNI: Musalem Favors Patient Approach On Fed Cuts
MNI (WASHINGTON) - Federal Reserve Bank of St. Louis President Alberto Musalem said Wednesday he favors a "patient" approach to lowering interest rates to a neutral level as long as inflation is above 2%.
The Fed's dual goals of maximum employment and stable prices are within sight and monetary policy is well positioned to respond to risks to achieving these objectives, but the neutral policy level and productivity trends are uncertain, he said.
"The time may be approaching to consider slowing the pace of interest rate reductions, or pausing, to carefully assess the current economic environment, incoming information and evolving outlook," he said in remarks prepared for a Bloomberg and the Global Interdependence Center conference in New York.
Core PCE inflation remains closer to 3% than 2% and progress has slowed, Musalem noted. His baseline expectation is for inflation to converge to 2% over the next two years, but data since September suggest a higher risk that that progress could stall or reverse, he said.
OPTIONALITY
"Easing policy too much too soon poses a greater risk than easing too little, or too slowly," he said. The Fed cut rates by a quarter point to 4.5%-4.75% last month following a jumbo 50 basis point cut in September, and Musalem's comments are in line with the minutes from the last decision.
At 4.6%, the midpoint of the current fed funds target range is already "well within" the range suggested by monetary policy rules, he noted, and neutral may be somewhere between 3% and 4%.
"Further reductions in the federal funds rate will therefore require careful management and depend crucially on an expectation of further convergence toward 2% inflation," Musalem said.
"It will be important at upcoming FOMC meetings to achieve optionality that best positions monetary policy for managing risks around the dual mandate goals and uncertainty about the neutral policy rate and productivity trends." (See: MNI INTERVIEW: Fed Closer To Slowing Rate Cut Pace - Kaplan)