Musalem’s confirmation that he pushed for a hike at last week’s meeting removes any ambiguity about his positioning and reinforces the hawkish signal already priced after his prepared remarks earlier in the day. His preference for gradual over abrupt rate changes suggests he sees a path of incremental tightening rather than a single large move, which should keep short-end yields and the dollar supported without triggering the sharper repricing a bigger shift would cause. The suggestion that El Nino could deliver a fresh supply shock adds another upside inflation risk for markets to weigh alongside energy and Middle East supply concerns. Risk-sensitive currencies including the Australian dollar remain exposed to further softness if Musalem’s view gains traction among other FOMC voters.
Earlier:
Musalem has now put a number on his hawkishness, confirming he wanted a hike last week and flagging both sticky underlying inflation and El Nino as reasons the Fed cannot afford to wait.
Summary:
- Musalem confirmed he favoured raising rates at last week’s FOMC meeting, where the Fed ultimately held its target range steady
- He said he sees a higher probability that inflation will remain above target
- Musalem said gradual rate increases are less costly than more abrupt rate changes
- He estimated underlying inflation is likely running between 2.5% and 3%
- Musalem said the job market is not a source of inflation
- He said he wants to see monthly inflation readings come in below 0.2%
- Musalem said he is very open minded about Fed task forces
- He flagged the El Nino weather event as a potential fresh supply shock
Federal Reserve Bank of St. Louis President Alberto Musalem confirmed in a Q&A session on Thursday that he favoured raising interest rates at last week’s Federal Open Market Committee meeting, where officials ultimately held the target range steady at 3.5% to 3.75%. The comments followed prepared remarks earlier in the day in which Musalem argued that monetary policy must impose meaningful restraint on inflation rather than tolerating higher prices in pursuit of productivity gains, and add further detail to just how hawkish his current reading of the economy has become.
Musalem said he sees a higher probability that inflation will remain above the Fed’s target, and put a number on the underlying trend, estimating it is likely running between 2.5% and 3%, well above the central bank’s 2% goal. He said he wants to see monthly inflation readings fall below 0.2% before he would be satisfied progress is being made. Asked about his preferred approach to any further tightening, Musalem said gradual rate increases are less costly than more abrupt rate changes, consistent with the incremental approach he described earlier in the week when he told the Financial Times that earlier, smaller moves are preferable to delayed, larger ones.
On the labour market, Musalem said the job market is not a source of inflation, a view that aligns with his earlier comments describing the labour market as stabilised with solid payroll growth and unemployment close to its long-run level. That framing allows him to press the case for tighter policy without pointing to labour market weakness as a competing concern. He also flagged a new potential risk to the inflation outlook, saying an El Nino weather event might act as a fresh supply shock, a comment that broadens the inflation debate beyond tariffs and Middle East energy disruptions to include agricultural and weather-driven price pressures.
Musalem added that he is very open minded about Fed task forces, without elaborating further on which initiatives he was referring to. Taken together, the remarks confirm Musalem as one of the more hawkish voices on the committee heading into the Fed’s next policy decision, with his emphasis on credibility, gradualism and a widening set of inflation risks likely to keep markets attentive to his commentary in the weeks ahead.
This article was written by Eamonn Sheridan at investinglive.com.