Fed's Musalem says going slow on interest-rate cuts makes sense

By Greg Robb

Costs of easing 'too much, too soon' are greater than easing a more gradual pace, St. Louis Fed president says

Cutting interest rates at a gradual pace seems to make sense given where the economy is today, St. Louis Fed President Alberto Musalem said Monday.

"I view the costs of easing too much, too soon as greater than the costs ofeasing too little, too late," Musalem said in a speech to the Money Marketeers of New York University, a group of economists who focus on financial markets.

Going too quickly "would mean that sticky or higher inflation would pose a threat to the Fed's credibility and to future employment and economic activity," he said.

Musalem said he wasn't advocating easing too little, too late. He said he was just weighing the costs of two undesirable policy paths.

In his speech, Musalem said he supported the Fed's aggressive half-point cut last month. He said he thinks further rate cuts are appropriate over time toward a "a neutral posture" of rates.

The Fed's benchmark rate is now in a range of 4.75%-5%. Fed officials see a neutral rate as somewhere near 3%, although many economists think that level might be higher.

The median forecast of Fed officials is for two more quarter-point cuts this year and four in 2025, bringing the policy rate to a range of 3.25%-3.5%.

Musalem said his own forecast of the policy-rate path was "slightly above the median."

Musalem said he thinks the economy will continue to grow at a solid pace over the next few quarters, with a healthy labor market and inflation coming back down to 2%.

"Both the labor market and inflation are in a good place," Musalem said. He added that he expected inflation, as measured by the Fed's personal consumption expenditure price index, to converge at the central bank's 2% annual rate target over the next few quarters.

"I believe the risks that inflation becomes stuck above 2%, or rises from here, have diminished," he said.

Federal Reserve Chair Jerome Powel, in a speech last week, said the central bank was in no "hurry" to cut rates quickly.

Following the strong September jobs report last Friday, many economists adjusted their calls to a quarter-point cut instead of a half-point cut at the upcoming Fed meeting on Nov. 6-7.

There will be another job report before that meeting, but Michael Feroli, chief U.S. economist at JPMorgan Chase, said it would have to be "a very soft outcome" to tilt the Fed toward a half-point cut.

Traders in derivate markets see almost a 90% chance of a quarter-point cut in November. The rest see the possibility that the Fed does not cut rates.

-Greg Robb

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10-07-24 1941ET

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