MNI: Fed's Musalem - Rates Currently At Right Level

The current level of U.S. interest rates is appropriate considering a solid labor market and inflation that remains above the Federal Reserve's target, St. Louis Fed President Alberto Musalem said Wednesday.

"The current modestly restrictive setting of the policy rate is consistent with today’s full employment labor market and core inflation nearly one percentage point above the Fed’s 2% target," he said in prepared remarks to the Peterson Institute of International Economics. 

"In the coming weeks and months, I will continue to update my outlook and my assessment of the balance of risks to seek a forward-looking path of interest rates that best positions monetary policy for achieving and maintaining maximum employment and price stability for all Americans."

The Fed is widely expected to reduce rates by a quarter point at its Sept. 16-17 meeting, though consensus for a cut within the FOMC is not yet complete. Musalem, an FOMC voter this year, suggested he's not in any rush to cut rates. (See: MNI POLICY: Fed Takes Measured Approach To Post-September Cuts)

BALANCED APPROACH

"Pursuing a balanced approach requires care," he said. "For example, putting most of the weight on the labor market goal runs a risk of unwarranted or excessive policy easing, causing a further steepening of the yield curve, a rise in the term premium or an increase in inflation expectations." 

"Any of those potential outcomes could do more harm than good to the labor market and contribute to more persistent above-target inflation. Although longer-term inflation expectations are anchored today, markets are sensitive to these risks, as evidenced by increases in the term premium and in some measures of long-term inflation expectations."

At the same time, Musalem said, placing too much emphasis on the inflation side of the mandate could potentially exacerbate threats to employment stability. 

"Putting most of the weight on the inflation goal runs the risk of not providing enough support to maintain a full employment labor market at a time when downside risks have risen," he said in remarks delivered at the Peterson Institute for International Economics.