The Federal Reserve should maintain a “modestly restrictive” monetary policy until there’s clear evidence that inflation is steadily declining towards the 2% target, according to St. Louis Fed President Alberto Musalem. He expressed concerns about potential risks that could hinder or even reverse the progress made in curbing inflation.
Musalem’s baseline projection anticipates inflation continuing its descent toward the 2% goal, supported by a robust labor market. However, he acknowledged the potential for upcoming government policy shifts to significantly influence the economic trajectory.
“This baseline scenario requires that monetary policy remains modestly restrictive until inflation convergence is assured, at which point the policy rate can be gradually reduced toward the neutral level as convergence progresses,” Musalem stated in prepared remarks delivered Thursday at the Economic Club of New York. The neutral rate represents a policy stance that neither stimulates nor inhibits economic growth.
“Around this baseline scenario, the risks of inflation stalling above 2% or moving higher seem skewed to the upside,” he cautioned. He further emphasized that the risk of inflation plateauing is more significant than the risk of a substantial weakening in the labor market.
In a conversation with reporters following his speech, Musalem reiterated his desire to observe “consistent” downward movement in inflation.
The Federal Reserve maintained its benchmark interest rate at its January meeting, signaling a willingness to hold steady until inflation demonstrably cools. Minutes from the meeting revealed that policymakers are also evaluating the potential for government policy changes to impede progress on inflation. President Donald Trump’s economic agenda, focused on significant alterations to US trade and immigration policies, is a key factor under consideration.
Musalem highlighted that “various changes in trade, immigration, regulatory, fiscal and energy policies, or other changes in the economic environment, could materially affect the path of the economy.”
Despite these potential influences, his “baseline scenario assumes the net effect on inflation and employment of all such policy changes will be small in the near to medium term.”
Recent consumer price index data indicated a rise in inflation in January, seemingly validating the Fed’s cautious approach to rate adjustments. However, some officials have pointed to the challenges in accurately accounting for seasonal factors in early-year inflation data, making the figures less definitive.
Musalem asserted that, taken at face value, recent inflation reports “show that more work is required to achieve price stability.”
Conversely, recent employment figures suggest a stable labor market. January saw a decline in the unemployment rate coupled with the addition of 143,000 jobs. Musalem characterized the labor market as “solid” and noted positive prospects for continued economic growth.
In conclusion, Musalem’s remarks underscore the Fed’s commitment to a data-driven approach, maintaining a “modestly restrictive” policy stance until inflation convincingly aligns with the 2% target. While acknowledging potential headwinds from policy changes and other economic factors, he expressed confidence in the baseline scenario of continued disinflation and sustained economic growth. The Fed will continue to monitor incoming data and adjust its policy accordingly to ensure price stability and maximum employment.
