Fed's Musalem: I would support additional tightening if inflation becomes stuck above 2%
Federal Reserve (Fed) Bank of St. Louis President Alberto Musalem noted on Tuesday that inflation progress may be a longer, slower process than many market participants currently hope. St. Lousi Fed President noted specifically that the labor market remains particularly tight, and that it could take entire months or quarters before policies drag inflation back to convicing Fed target levels.
Key highlights
I need to observe a period of favorable inflation, moderating demand and expanding supply before he will have confidence for an interest rate cut.
The retail sales data for May suggests aggregate demand is growing at a moderate pace so far in Q2.
I will remain vigilant until inflation is clearly and convincingly is well on its way back to 2%.
If inflation becomes stuck meaningfully above 2% or moves higher, I would support additional policy tightening.
These conditions could take months and more likely quarters to play out.
I expect some further cooling in labor market in coming months.
The labor market no longer seems overheated, but remains tight.
I expect aggregate consumption to moderate in coming quarters without stalling and then return to or slightly exceed trend by 2026.
Financial conditions feel accommodative in some parts of the economy, and restrictive in others.
It is possible that monetary policy transmission may be slower this cycle.
Personal Consumption Expenditures Price Index should show welcome downshift of inflation in May.
The current monetary policy stance seems restrictive, but there is some uncertainty about to what degree.
Continued high employment and wage growth should moderate impact of easing labor market conditions on aggregate demand.
There are potential early signs of continued progress on inflation.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.