St. Louis Federal Reserve President Alberto Musalem has stated that he supports the U.S. central bank's decision to lower interest rates by half a percentage point last month, but emphasized that he prefers gradual rate cuts. Musalem said that the interest rate path he anticipates will be slightly higher than the official midpoint in the Summary of Economic Projections released by the Federal Open Market Committee (FOMC) last month, but he will not prejudge the scale or speed of future interest rate changes.
"Considering the current economic conditions, I believe the cost of easing policy too much too soon is greater than the cost of easing too little too late," Musalem said in a speech at New York University on Monday.
"I believe that further gradual reductions in the policy rate over time may be appropriate," Musalem said in his speech. "Patience has served the FOMC well in pursuing price stability, and it remains appropriate now, but I will not prejudge the scale or timing of future policy adjustments."
Federal Reserve officials last month cut the benchmark interest rate by half a percentage point, a move that exceeded expectations, with Federal Reserve Chairman Powell stating that the move aimed to protect the strong labor market.
Musalem said the move was appropriate because inflation was falling towards the central bank's 2% target faster than he expected. He predicted that the Federal Reserve's preferred inflation indicator—the Personal Consumption Expenditures Price Index—would fall to 2% "in the next few quarters."
Economic projections released after the September meeting showed that the median forecast among policymakers is for another half-percentage-point rate cut this year, which means the central bank will cut rates by a quarter of a percentage point at each of the remaining two meetings in 2024. Seven officials expected only one more quarter-point rate cut this year, and two officials opposed further adjustments.
Gradual rate cut path
In an interview last month, Musalem said he preferred a "gradual" rate cut following the large cut in September, adding that policymakers were starting the easing cycle from a "position of strength."
Data released by the U.S. Bureau of Labor Statistics last week showed that the U.S. labor market added 254,000 jobs last month, the most in six months, and the unemployment rate fell to 4.1%. The stronger-than-expected jobs report eased concerns about the job market, reduced some pressure on the Federal Reserve, and provided policymakers with room to cut rates at a slower pace in the future."The job market and inflation conditions are both good, and I believe the risks to these two objectives are roughly balanced around the baseline," he stated.