MNI BRIEF: Fed's Musalem Says He Could Support A Rate Cut

St. Louis Federal Reserve President Alberto Musalem said Friday he could support another rate cut later this month if risks rise for the labor market and inflation doesn't get worse, adding the current stance of monetary policy is somewhere between modestly restrictive and neutral. 

Musalem repeated past comments that a higher neutral rate means the central bank might not have room to reduce borrowing cuts much further and wouldn't pre-commit to any path after this month's meeting. "Right now, I think it's particularly important to go meeting by meeting updating information," he said at an Institute of International Finance event. (See: MNI INTERVIEW: Fed Right To Remain Cautious On Rate Cuts-Kohn) 

Recent labor market data "suggests to me that we're not in an imminent deterioration of the labor market. Risks have increased," he said, rattling off indicators that concern him such as the unemployment rate of cyclically sensitive groups, people working part time for economic reasons, people unemployed longer than 27 weeks, and job finding expectations. Still, the St. Louis Fed president said a net decrease in employment was possible though without a sudden increase in the unemployment rate.

Inflation pressures look likely to intensify over the near-term, he said. "My own expectation is that tariffs will work through the economy for the next two to three quarters, and by the second half of 2026 that will have finished, and inflation will then return to a path towards 2%, but there's risk to that," Musalem said, noting his business contacts have said they are feeling significant pressure on margins.