Fed’s Musalem Indicates More Rate Cuts Likely, Yet Data Will Guide Policy Decisions

By Michael S. Derby

Federal Reserve Bank of St. Louis President Alberto Musalem expressed support on Monday for more interest rate cuts as the economy progresses, emphasizing that future monetary policy decisions will depend on economic performance.

Musalem stated, "Further gradual reductions in the policy rate will likely be appropriate over time," highlighting that "patience" has been beneficial for the Federal Reserve. He refrained from making predictions about the size or timing of upcoming policy adjustments.

His remarks were originally intended for a speech at a meeting of the Money Marketeers of New York University in New York. Musalem, who recently assumed his position and does not have a vote on the rate-setting Federal Open Market Committee, spoke at a time when the outlook for interest rates has changed once again.

Recent government data indicated unexpected strength in the job market, challenging previous concerns about a slowdown in the labor sector. In light of declining inflation pressures, the Fed reduced its interest rate target by half a percentage point last month, bringing it to a range between 4.75% and 5%. Despite this move, the robust hiring data in September has raised questions about the extent of future rate cuts.

Musalem supported the Fed’s recent decision and indicated that his policy outlook is "slightly above the median" projected by his peers. He advocated for a cautious approach to rate cuts, predicting that inflation will return to 2% over the next few quarters and expressing confidence that the current job market reflects a strong economy.

He remarked, "Given where the economy is today, I view the costs of easing too much too soon as greater than the costs of easing too little too late." He cautioned that persistent or rising inflation could jeopardize the Fed’s credibility and impact future employment and economic growth.

Musalem also noted that while there’s a possibility inflation may not align with the 2% target, he believes the likelihood of inflation remaining above 2% has decreased.

Additionally, he commented that financial conditions continue to support economic activity, although uncertainty surrounding the outcome of the upcoming U.S. elections on November 5 may cause some businesses to pause until they gain more clarity.