Fed’s Musalem open to another rate cut, urges caution on inflation

Investing.com -- St. Louis Federal Reserve Bank President Alberto Musalem said Friday he is open to another interest rate cut to protect the labor market, but emphasized the need for caution due to persistent inflation concerns.

"I am open minded about a potential further reduction in interest rates to provide further insurance against labor market weakening," Musalem stated, adding that monetary policy is currently positioned between "modestly restrictive and neutral."

The Fed official warned that there is "limited room for further easing before monetary policy could become overly accommodative," and stressed that policy "should continue to lean against persistence in inflation."

Musalem described the Fed’s goals as being "in tension," with inflation running above target while the labor market shows potential signs of weakness. He noted that inflation remains "materially above target," with only about 10% of current inflation attributable to tariffs.

While financial conditions are currently "accommodative," Musalem expects the impact of tariffs on inflation to fade by the second half of 2026, when "prices to stop increasing due to tariffs."

Regarding economic growth, Musalem projected "healthy" fourth quarter GDP, with growth likely to be "close to potential for this year." He supported the September rate cut as insurance against labor market weakening, though he expects the labor market to "soften some in orderly way."

Musalem observed that while data suggests all households are spending, anecdotal evidence indicates low-income households are "stretching to do so." He clarified that some consumer spending, particularly among Hispanic consumers, has softened, with low-income households "pulling back on spending because of inflation, not from job market" conditions.

The Fed official emphasized that inflation expectations are "a little elevated up to 2 years out," though long-term expectations remain anchored. He stressed that achieving the Fed’s 2% inflation goal is "really important."