Fed’s Musalem urges caution on rate cuts, sees limited room to ease

Investing.com -- St. Louis Federal Reserve Bank President Alberto Musalem on Thursday called for a cautious approach to monetary policy, stating that there is "limited room to ease further without becoming overly accommodative."

Speaking at the University of Evansville in Indiana, Musalem noted that policy is now "closer to neutral than to modestly restrictive" and emphasized the need to "lean against above-target inflation while providing some support to the labor market."

Musalem pointed out that inflation remains too high at 3%, while acknowledging various economic factors at play. He described the economy as "pretty resilient" despite expecting weakness in the fourth quarter, followed by a rebound in the first quarter of next year.

Looking ahead, Musalem projected that economic growth would be "at or above potential" next year, supported by "very accommodative financial conditions and deregulation." He expects the labor market to "stay around full employment" but likely "soften a little" to reach 4.5% unemployment.

On inflation, Musalem predicted a decline beginning in the second half of next year, "provided we have appropriate monetary policy." He also expected the impact of tariffs to fade during the same period.

Regarding business conditions, Musalem observed that outside of data centers, "business investment has been tepid" and noted that businesses are "learning how to run their firms in uncertain environment."

The Fed official also commented on artificial intelligence, saying it "appears to be adding to productivity and displacing workers," though he was "doubtful that most announced layoffs are AI, more likely plain vanilla automation."

Musalem supported the rate cuts implemented so far to "protect the labor market" but stressed the need to "proceed with caution now" given the current economic landscape.