Why One Fed Official Thinks Interest Rates Are At ‘Appropriate’ Levels

In the lead-up to December’s Federal Open Markets Committee, St. Louis Federal Reserve Bank President Alberto Musalem cautioned against cutting its influential interest rate

In remarks at a Bloomberg News event, St. Louis Federal Reserve Bank President Alberto Musalem said the current federal funds rate is “appropriately restrictive” for economic conditions, suggesting he could be more inclined than some of his colleagues to pause when the Federal Reserve next makes an interest rate decision on Dec. 18.

“Monetary policy is well positioned,” Musalem said. “The policy rate remains above plausible levels for the neutral policy rate, appropriately so with inflation above target and a labor market close to full employment.”

His statements follow comments by other Fed officials this week. In comments this week, Federal Reserve Gov. Christopher Waller, San Francisco Fed President Mary Daly, and others suggested that policy was merely “restrictive.”

“Policy is still restrictive enough that an additional cut at our next meeting will not dramatically change the stance of monetary policy and allow ample scope to later slow the pace of rate cuts,” Waller said.

Some officials kept open the possibility of skipping a rate cut in December, with Daly telling Fox Business that she had an “open mind” about keeping rates at their current levels.

Traders, on the other hand, have priced in a 76% chance that the Fed will cut by a quarter-point in December, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.

Warns Over Cutting ‘Too Much Too Soon’

Musalem, an alternate member of the Federal Open Market Committee (FOMC), didn’t directly signal what action he supports at the upcoming meeting. He did, however, argue that recent strong labor reports, along with inflation data showing price pressures easing more slowly, mean that the Fed needs to be “patient” when considering rate cuts. 

“In the current environment, easing policy too much too soon poses a greater risk than easing too little or too slowly,” Musalem said. 

Musalem’s and other officials’ comments come ahead of the start of the Federal Reserve’s blackout period on Saturday, which restricts their comments about policy before the December 17-18 meeting.