After the Federal Reserve's first rate cut in four years, St. Louis Fed President Alberto Musalem suggests a gradual reduction in rates. On Friday, Musalem indicated that the U.S. economy could respond significantly to overly loose financial conditions, potentially prolonging the time needed to bring inflation back to the 2% target.
Musalem, who assumed his role in April and will become a voting member of the Federal Open Market Committee (FOMC) next year, emphasized the importance of easing monetary policy gradually. Last week, the Fed initiated its easing cycle with an aggressive 50 basis point cut instead of the traditional 25 basis points, lowering the federal funds rate target range from 5.25%-5.5% to 4.75%-5%.
This rate cut, explained by Fed Chair Jerome Powell during a press conference, aims to maintain economic momentum amidst falling inflation while avoiding labor market weakness. Although Musalem is not a voting member this year, he supported the rate cut in September. He acknowledged a cooling U.S. labor market in recent months but remained optimistic due to low layoff rates and a strong overall economy.
Musalem noted that the business sector is in “good shape” with stable activity levels and that large-scale layoffs are unlikely soon. However, he recognized that the Fed might need to accelerate rate cuts if economic weakness exceeds expectations.
Fed Governor Christopher Waller also expressed willingness for more aggressive cuts if economic data deteriorate faster. Musalem mentioned that risks of rapid economic shifts have subsided, and future rate decisions will depend on forthcoming data.
Musalem refuted claims that the 50 basis point cut in September was a “catch-up” move, highlighting that inflation has declined quicker than anticipated. The August Personal Consumption Expenditures (PCE) price index showed a year-over-year increase of 2.2%, nearing the Fed's 2% target.
