FED: St Louis's Musalem: Current Rates Appropriate Despite Higher Labor Risks

St Louis Fed President Musalem (2025 FOMC Voter, hawk) suggests that rates are currently at the right level given economic conditions. He doesn't explicitly argue for a rate hold in September - leaving it uncertain whether he would dissent against the Committee's likely decision to cut 25bp. But it's pretty clear that while he is prepared to ease policy at some point in the future, and he recognizes that the balance of risks is tilting a little more toward missing on the employment mandate, he is comfortable with keeping policy "modestly restrictive" for now.

• In his speech he notes "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... 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."
• He notes that "Recent data have further increased my perception of downside risks to the labor market. These include a higher proportion of longer-term unemployed workers, rising unemployment rates for demographic groups that are more sensitive to economic cycles, and substantial downward revisions to payroll growth estimates" as well as the upcoming QCEW benchmark revisions. On inflation, "I expect the effects of tariffs will work through the economy over the next two to three quarters and the impact on inflation will fade after that". with inflation "resum[ing] convergence toward 2% in the second half of 2026".
• Musalem elaborates in Q&A that he is seeing increased risks to the employment mandate, but moderating risks to the inflation mandate: "In terms of the balance of risks, what I've been doing over the last two months is I've been revising my assessment of downside risks to the labor markets slightly higher, as I've seen some deterioration in some of the underlying full employment numbers, and I've been revising my assessment of the risk of persistent above target inflation slightly lower, in part because the pass through so far of tariffs on to inflation has been low, only at around 20% as measured by St Louis economists, and that's 20% of a theoretical full pass through scenario. That's low, but there's still uncertainty. You know, we could have more rounds of tariffs. The pass through could increase over time, and there's only been really three months of data. So May, June and July, data after the tariffs were raised meaningfully and in April, so three months of data."
• Even so, he warns that adjusting policy is currently a balancing act: "Pursuing a balanced approach requires care. 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. At the same time, 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. Again, balance is the key."