St. Louis Federal Reserve President Alberto Musalem supports the U.S. central bank's recent decision to lower interest rates by half a percentage point. However, he emphasizes a preference for gradual rate cuts. Musalem anticipates a slightly higher rate path than the Federal Open Market Committee's (FOMC) recent economic forecasts but refrains from speculating on future rate changes' magnitude or timing.
In a speech at New York University, Musalem highlighted the risks of easing policies too early and too much, compared to acting late and too little. He believes that gradually reducing policy rates may be appropriate over time, noting the effectiveness of patience in maintaining price stability.
Last month, the Federal Reserve cut the benchmark rate by half a percentage point, exceeding expectations. Fed Chair Jerome Powell noted this action aimed to protect a strong labor market. Musalem considered this move apt as inflation trends towards the central bank's 2% target faster than expected. He expects the preferred inflation metric, the Personal Consumption Expenditures Price Index, to drop to 2% within the next few quarters.
The economic forecast released after the September meeting indicates a median expectation for another half percentage point rate cut this year, suggesting quarter-point reductions in the remaining two meetings of 2024. Seven officials foresee only one more quarter-point cut this year, while two oppose further adjustments.
Musalem mentioned a preference for gradual rate reductions following September's significant cut, emphasizing that policymakers commenced this easing cycle from a strong position. The U.S. labor market, according to data from the Bureau of Labor Statistics, added 254,000 jobs last month, the most in six months, with unemployment dropping to 4.1%. This robust employment report alleviated concerns, reducing pressure on the Fed and allowing for a slower pace of rate cuts.
Overall, Musalem stated that the risks to both employment and inflation goals are roughly balanced.
