By Michael S. Derby
NEW YORK (Reuters) – St. Louis Federal Reserve President Alberto Musalem said on Wednesday he expects the U.S. central bank may continue to cut interest rates, but is unwilling to say what he thinks should be done during the policy meeting later this year. month.
With inflation likely to continue to trend toward the Fed’s 2% target over time, “a further easing of moderately restrictive policy toward neutral will be appropriate over time,” Musalem said at a Bloomberg monetary policy conference.
“On this baseline, it appears important to maintain policy optionality, and the time may be approaching to consider slowing, or pausing, the pace of rate cuts to carefully assess the current economic environment, incoming information and evolving prospects ” he said. .
Financial markets expect the Fed to cut its policy rate by a quarter of a percentage point from the current range of 4.50%-4.75% at its December 17-18 meeting, as it seeks to adjust its policy stance to declining inflation and a better economy. -balanced labor market.
Musalem said he needs to see more data before solidifying his view on what is needed at the meeting. He said, “I’m keeping all my options open.”
However, longer-term policy prospects have become less clear following President-elect Donald Trump’s victory in last month’s US elections. Trump ran on a platform of tariffs, deportations of undocumented immigrants and tax cuts, which could reignite inflationary pressures and disrupt the economic landscape.
Musalem noted that the “textbook” understanding of tariffs points to higher prices and lower demand, but he noted that he will consider changes in government policy as they arise. He said none of this uncertainty militates against the central bank continuing to make forecasts.
He also said monetary policy is “well positioned” to deal with the economic outlook and that the current restrictive stance is appropriate given that core price pressures remain above the Fed’s 2% inflation target. Musalem noted that “in the current environment, easing policy too quickly carries a greater risk than easing policy too little or too slowly.”
He said it could take another two years for inflation to reach the central bank’s target, adding that patient monetary policy is appropriate given current inflation levels in a “strong” economy and labor market that is at levels consistently is at full employment.
Musalem said he expects growth to moderate towards the economy’s long-term potential, amid further labor market cooling and moderating wage growth. “I expect the labor market to remain consistent with full employment, while the unemployment rate increases modestly toward estimates of the natural level,” he added.
