MNI BRIEF: Fed's Musalem Urges Caution On Further Rate Cuts

The Federal Reserve must be cautious cutting interest rates further because inflation remains too high, St. Louis Fed President Alberto Musalem said Monday. 

"I'm open-minded to future potential reductions in interest rates. I do believe we need to tread cautiously because the room between now and the point where policy can become overly accommodative is limited," he said at a Washington University in St. Louis event.

Inflation is running closer to 3% than the Fed's 2% target, while the labor market is near full employment, Musalem said. St. Louis Fed economists view the impact of tariffs on inflation as more muted than expected, responsible for only about 20-30bps of inflation so far, "which means most of the inflation that's persistent is driven by things other than tariffs," he said. "It's important to lean against above-target inflation independent of how it's generated." 

"Inflation will stay elevated for two or three quarters while the tariffs play through the economy and then converge to 2%," he said. "The labor market continues to soften but remains around full employment." (See: MNI INTERVIEW: Fed Right To Remain Cautious On Rate Cuts-Kohn)