FED: St Louis's Musalem: Productivity Advances Have Mixed Impact On Rate Outlook

St Louis Fed President Musalem says at today's MNI event that "while I see less evidence that inflation will accelerate from here, I still see some possibility, some risk, that inflation could be stickier than we would like, and that will be more persistent." * Even so, he's encouraged on some inflation fronts: "We have the effect of tariffs should wane after the first half of the year, goods prices should begin to increase at a lesser rate than they have that should contribute to bring inflation lower. We have rent inflation ... will continue over time to bring services inflation lower. And we have, of course, energy prices, which directly on headline and indirectly, on core, are helping to bring inflation lower." * But "At the same time, we have a very robust economy with a very robust consumer, with very strong demand, with rising electricity and other energy prices. And so therefore we have to watch the balance of risks, given the risk that inflation could still be persistent." * Against that backdrop, "I think that is unnecessary and unadvisable to bring monetary policy into an accommodative stance at this point in time." * He also says that while stronger productivity means "you can have higher growth with lower inflation, with lower interest rates on one hand, on the other hand, to get that productivity, you need a lot of investment, and a lot of investment means a lot of investment demand, a lot of demand for borrowing, and that would probably push up the long term interest rate". Put another way, "there are two effects there. There's on one hand, higher productivity leads to lower interest rates, lower inflation with higher growth. On the other hand, you need to investigate that productivity and that increased demand for capital increases the long term neutral rate." * In short, he's going to be "I'm hopeful that we are in a higher productivity regime, but I think it's early to call that, and I think we can't outsource our responsibility to bring inflation back to target to an assumption about about productivity."

IRAN: Trump Gives Clearest Indication Yet Of Possible US Intervention

US President Donald Trump's latest post on Truth Social: https://truthsocial.com/@realDonaldTrump/posts/115888317758045915 marks the most interventionist comments from the White House to date regarding the protests that have rocked Iran in recent weeks. Previously, Trump had warned the regime against violent crackdowns and threatened unspecified intervention. Trump called for "Iranian Patriots" to "KEEP PROTESTING" and "TAKE OVER YOUR INSTITUTIONS", adding that the "killers and abusers [...] will pay a big price", all meetings with Iranian officials have been cancelled, and that "HELP IS ON ITS WAY". In doing so, Trump has raised the rhetoric and apparent prospects for direct US military intervention in the ongoing protest movement. * The FT notes : https://www.ft.com/content/6979289f-701e-4159-bd3c-d5a01cc18ed3some of the military options on the table for Trump, including "Iranian military and Revolutionary Guards' infrastructure, command and control centres and warehouses of weapons and supplies used by the government and its militias". A major escalation would be strikes on senior regime members, which would risk instability. Indeed, any US strikes risk a 'rally round the flag' effect, where the focus of public anger shifts towards the US rather than the regime. * Earlier, European Commission President Ursula von der Leyen confirmed that "Further sanctions on those responsible for the repression will be swiftly proposed," with the Islamic Revolutionary Guards Corps (IRGC) already under sanctions "in its entirety". European High Representative for Foreign Affairs and Security Policy Kaja Kallas had previously said she could propose sanctions over the protests in addition to those in place over Iranian human rights abuses, nuclear activities and support for Russia.

FED: St Louis's Musalem: Labor Market Resilient, Set To Stabilize

St Louis's Musalem says at this morning's MNI event that the latest nonfarm payrolls report for December and other data suggest a "resilient" labor market that he expects to "stabilize around current levels". * "What I see is a labor market that has been cooling in an orderly way over the past nine months or so, I see demand and supply factors that have been at play...what I took away from it is, the unemployment rate's right around the neutral rate of unemployment. I took that payrolls are growing right in the middle of the range that we estimate [St Louis Fed] to be the new break even rate, which we say somewhere between 30,000 to 80,000 persons per month. And in terms of compensation growth, it is robust compensation growth, but consistent with a very high labor productivity that we've had in the last few quarters... if you look at the employment components of a lot of the business surveys, they've been robust. If you look at unemployment claims, they've been stable or coming down as new claims. And if you look at layoff announcements, they have come back out again, at least in the last read. So all in all, I see labor market that has been resilient. I expect it to stabilize around current levels. And the last labor report in my read was, was a good one." * He eyes solid growth in 2026: "I expect the economy to grow and operate at or above potential in the coming year, there are some very robust tailwinds. We have a positive fiscal impulse, we have the cumulative lag effects of the 175 basis points of monetary policy easing working through the economy, we have accommodative financial conditions. And so all these, I think, will lead to a robust economy this year. The economy was very robust last year, very resilient to a number of shocks, and so that tells me the labor market will be stabilizing, will be supported by those dynamics."

FED: St Louis's Musalem: Today's CPI Encouraging, But Little Reason To Cut Soon

St Louis Fed President Musalem (non-2026 FOMC voter) appears encouraged by recent inflation developments but is nonetheless hesitant about making further rate cuts in the near-term. * He says at today's MNI event that he expects inflation to resume its convergence to the 2% target over the course of this year, and today's inflation data "was encouraging that respect" with the 3-month rate of inflation trending lower. * He says that his "sense" is that "policy is right around neutral" and "well positioned right now, balancing both the expected path of the economy and the risk on both sides". * Musalem says he sees "little reason for near-term further easing of policy". * That said, "If the labor market risks were to rise more than I currently expect, or if the risk that expected inflation begins to undershoot 2% on a persistent basis increases, of course, at that point, it might be appropriate to reduce the policy rate further, but I would have to see those risks materialize."