MNI: Musalem Says Fed Should Be Cautious In Further Rate Cuts

Federal Reserve Bank of St. Louis President Alberto Musalem said Friday the U.S. central bank should proceed with caution as it considers further interest rate cuts but he remains open-minded about easing. 

"I am open minded about a potential further reduction in interest rates to provide further insurance against labor market weakening," he told the Springfield Area Chamber of Commerce in Missouri. 

"I believe that we have to tread with caution, because there's limited room for further easing before monetary policy could become overly accommodative. And I believe that monetary policy should continue to lean against persistence in inflation, whether that persistence comes from tariffs, from a lower growth in labor supply, or for any other reason."

Musalem said monetary policy is "somewhere between modestly restrictive and neutral. I see when I look out the window financial conditions and financing conditions which are very accommodative of a growing economy."

MANDATE TENSION

He expects healthy fourth quarter GDP but also inflation that will stay above target. "We have inflation running at about 3% which is a full one percentage point above our 2% target. So it's running high. At the same time we have a labor market, which is still at full employment, but it's showing some signs of potential risks and weakness. So there's there's some tension there." 

Some of that elevated inflation is due to tariffs, he said. "Our team estimates that only about two tenths, maybe three tenths of the 3% is tariffs. So only about 10% of the inflation that we're seeing so far is tariffs." (See: MNI POLICY: Fed Set To Keep Cutting Rates Despite Missing Data) 

He expects the impact of tariffs on inflation to fade after another two or three quarters. "By the second half of 2026 I expect tariffs to have played themselves through the economy, for prices to have increased and then to stop increasing after that, at least due to tariffs, and for inflation to continue or return to convergence towards 2% which is our target."

"I expect the labor market to continue to soften some going forward in an orderly way with supply and demand, both muted. That's the baseline, but there are material risks around the baseline."