Fed's Musalem: We Have Limited Room to Cut Rates

Federal Reserve Bank of St. Louis President Alberto Musalem said he expects the US economy to bounce back strongly early next year, underscoring the need for officials to approach additional interest-rate cuts with caution.

“We’re going to get, I think, a substantial rebound in the first quarter,” Musalem said Monday, citing an expected bump when the government shutdown ends, fiscal support, the impact of rate cuts already made and deregulation.

Speaking with Bloomberg reporters and editors, Musalem reiterated his view that current Fed policy is close to the level where it would no longer put downward pressure on inflation. He speaks with Bloomberg TV International Economics & Policy Correspondent Michael McKee on Bloomberg's Open Interest.

“It is very important that we tread with caution, because I believe there’s limited room for further reductions without monetary policy becoming overly accommodative,” he said.

After lowering interest rates twice this year, Fed officials are divided over how much more to cut borrowing costs. Fed chair Jerome Powell said last month that a rate cut in December was not a foregone conclusion. And several officials speaking since the central bank’s October gathering have pushed for a pause in December, emphasizing the need to tame above-target inflation.

Musalem said he is seeing increasing signs of strain among low and middle-income households who are struggling to cover rising expenses. That’s driving more people to visit food pantries and request assistance with paying utility bills.

He cited those as evidence that consumers are losing purchasing power to inflation.

Real Incomes

The trends “drive home the importance of our delivering on the inflation mandate, returning that back toward 2%, so that people can rebuild their real incomes,” he said.

The St. Louis Fed chief said only about 40% of the inflation that is above the central bank’s 2% target is due to tariffs, and policymakers need to continue to lean against the other forces driving prices higher, including sticky services inflation.

While the labor market is softening and the unemployment rate could rise because of the government shutdown, Musalem said his he expects the jobs landscape to stabilize around full employment.

In a separate interview on Bloomberg Television, Musalem acknowledged concern over asset valuations and pointed to the Fed’s recent semi-annual report on financial stability.

“It’s not our job to opine on particular valuations of markets, but if you look at that report, house prices seem elevated relative to historical standards, stock prices seem elevated, and to me it’s just the flip side of accommodative financial conditions,” Musalem said.

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