Musalem’s remarks reinforce the hawkish tilt he signalled after last week’s FOMC meeting, framing any tolerance of above-target inflation as a direct threat to the Fed’s credibility rather than a reasonable trade-off for productivity gains. That message points toward continued upward pressure on the front end of the Treasury curve and support for the US dollar, as markets price a lower probability of near-term easing. A stabilised labour market alongside persistent inflation gives Musalem a stronger platform to argue for holding, or eventually raising, rates, which should keep pressure on risk-sensitive currencies including the Australian dollar. Equity markets sensitive to rate expectations may see modest weakness on the reminder that the Fed’s easing bias has effectively been shelved.
Yesterday:
Musalem is telling markets the Fed will not trade inflation control for a productivity bet, arguing that credibility, not growth hopes, has to anchor policy from here.
Summary:
- Musalem said inflation is well above the Fed’s 2% target and that the balance of risks is tilted toward inflation staying above target a year or more from now
- He said it is crucial that monetary policy impose meaningful restraint on underlying inflation rather than tolerating higher inflation now in hopes of future productivity gains
- Musalem argued that easing policy to foster higher productivity would be a mistake, since it assumes the Fed’s credibility can be taken for granted
- He said the trade-off only works if households, firms and investors keep expecting inflation to return to target, and that tolerating above-target inflation risks that anchor
- Musalem described the economy as resilient in recent months, with the labour market stabilised, solid payroll growth and unemployment close to its long-run level
- The remarks, delivered in a speech prepared for São Paulo, were his first since last week’s FOMC meeting, where the Fed held rates at 3.5% to 3.75%
Federal Reserve Bank of St. Louis President Alberto Musalem said it is critical for monetary policy to keep working to bring down inflation, arguing that the Fed should not ease policy in hopes of fostering higher productivity growth that might lower prices down the road. Musalem said inflation remains well above the Federal Open Market Committee’s 2% target and that the balance of risks is tilted toward inflation staying above target for a year or more, in a speech prepared for delivery in São Paulo, Brazil on Thursday.
He said it is crucial that monetary policy put meaningful restraint on underlying inflation, rather than tolerating somewhat higher inflation today in pursuit of productivity growth tomorrow. Musalem devoted much of his remarks to examining a potential trade-off in which the Fed keeps policy easier than it otherwise would be to allow for higher productivity, in the hope that this eventually feeds through to lower price pressures. He called such a move a mistake, saying the reasoning takes the central bank’s credibility for granted. The bargain only works, he said, because households, firms and investors keep expecting inflation to return to target, and a central bank seen tolerating above-target inflation on the promise of a future productivity windfall can put that anchor at risk.
Musalem also struck a resilient note on the broader economy, saying it has performed well in recent months and that the labour market has stabilised, with solid payroll growth and an unemployment rate close to its longer-run value. That combination, a steady jobs market alongside inflation still running hot, underpins his argument that the Fed has room to prioritise price stability without leaning on labour market weakness as a reason to ease.
The remarks were Musalem’s first public comments since last week’s FOMC meeting, at which officials held the federal funds rate target range steady at 3.5% to 3.75%. Markets have continued to price expectations that policymakers will eventually need to lift rates further to bring down elevated inflation, a view Musalem’s latest comments do little to discourage.
This article was written by Eamonn Sheridan at investinglive.com.