Fed’s Musalem says monetary policy in right place

Investing.com -- St. Louis Federal Reserve President Alberto Musalem indicated Wednesday that the U.S. central bank’s monetary policy is appropriately positioned given current economic conditions, without clearly signaling his stance on a potential interest rate cut at the upcoming September meeting.

"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," Musalem said in a speech at the Peterson Institute for International Economics.

Musalem emphasized that he needs additional economic data before determining his position on future monetary policy direction. He stated he would "continue to update my outlook and my assessment of the balance of risks" to determine the best path forward for interest rates.

His remarks come ahead of the Fed’s September 16-17 policy meeting, where markets widely anticipate a quarter-percentage-point cut from the current 4.25%-4.50% range. Fed Chair Jerome Powell recently suggested such a reduction might be possible.

Regarding employment, Musalem described the current labor market as at "full employment" but noted he expects it to "gradually cool and remain near full employment with risks tilted to the downside." He cited increases in underlying unemployment measures and recent downward data revisions as factors that have "further increased my perception of downside risks to the labor market."

On inflation, Musalem predicted that tariffs would likely represent a temporary challenge for the economy, with their impact working through the system over the next two to three quarters before fading. He added that "below-trend real GDP growth and stable longer-term inflation expectations should limit the persistence of inflation."

Looking further ahead, Musalem projected that "inflation will resume convergence toward 2% in the second half of 2026," while acknowledging "a reasonable possibility that above-target inflation could be more persistent."

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