St. Louis Federal Reserve President Alberto Musalem said the Fed doesn’t need to cut interest rates any further right now. He explained that cuts should only happen if inflation drops faster than expected or if the job market begins to weaken.
Musalem: Current Interest Rate Is Already Neutral
In prepared remarks for an event at the University of Arkansas, Musalem said the current policy rate range of 3.50% to 3.75% is now at a neutral level. That means it is neither pushing the economy forward nor slowing it down.
He added that the economy is still expected to grow above its long term trend. Because of that, he doesn’t believe more monetary support is needed at this stage.
Economic “Tailwinds” Reduce the Need for Stimulus
Musalem pointed out that the economy is already getting support from other areas. He said credit conditions and fiscal policy are acting like “tailwinds” that help growth.
With those supports already in place, he warned that lowering rates too much could push policy into an overly supportive position.
Inflation Still Above Target, Risks Remain
Musalem said inflation is still running around one percentage point above the Fed’s 2% goal. While he expects inflation to keep moving down toward the target, he also noted that there is still a chance inflation could remain stubborn.
Because inflation is still above target, he believes it would be risky to cut rates into accommodative territory right now.
Job Market Risk Looks Lower Than Before
Musalem also said the risk of a major weakening in the job market has decreased. In his view, there is now less chance of a sharp drop in employment conditions.
That is another reason he doesn’t see an urgent need for additional rate cuts unless the labor market begins to show clear signs of trouble.
