St. Louis Federal Reserve President Alberto Musalem said Friday that the central bank will need to tighten monetary policy soon because inflation remains above the Fed’s target, putting pressure on policymakers after they left interest rates unchanged this week.
Musalem made the comments in prepared remarks for the Shadow Open Market Committee, a group that examines Federal Reserve policy. He said price pressures continue to pose upside risks and that inflation is unlikely to ease without further action from the central bank.
“I judge that additional firming of monetary policy will be necessary, and soon.”
Musalem said earlier and smaller rate increases would be less disruptive than waiting and then taking larger steps. He said moving sooner, while inflation expectations remain anchored, would give policymakers a better chance of bringing prices under control without harming employment or economic growth.
The Fed’s current position
The Federal Open Market Committee left its benchmark policy rate in a range of 3.75% to 4% after its meeting this week. The decision followed a rate increase in September. Financial markets expect another increase in short-term borrowing costs at the Fed’s December meeting.
- Inflation remains above the Fed’s 2% target, Musalem said.
- U.S. economic growth reached 3.4% in the latest quarterly data cited by Musalem.
- The unemployment rate is 4.2%, which Musalem said is at the median of Federal Open Market Committee participants’ long-run projections.
Musalem described the U.S. economy as resilient and said financial conditions remain accommodative, despite tightening recently. He pointed to investment tied to the artificial-intelligence buildout as one factor supporting demand. He also said the labor market has remained stable and balanced.
The latest personal consumption expenditures price index, released Thursday, showed annual inflation above 3%, Musalem said. The index is the Fed’s preferred inflation gauge. The central bank has been monitoring persistent price increases as it weighs whether additional rate increases are needed.
Musalem does not have a vote on the Fed’s policy-setting committee this year. He is scheduled to become a voting member in 2027. Two Fed policymakers dissented from this week’s decision and supported raising rates, while Fed Chairman Kevin Warsh said at a news conference that he was encouraged by the progress made in lowering inflation.
