Federal Reserve's Moussali: Current interest rates "will remain appropriate for some time"

Investing.com - The President of the Federal Reserve Bank of St. Louis, Alberto Musalem, said on Wednesday that risks to both inflation and employment are rising, and that officials should be prepared to adjust interest rates in either direction depending on how the economy develops.

“Policy is in a favorable position to address the risks facing the dual-mandate objectives, and I expect the current policy rate setting to remain appropriate for some time,” Musalem said in prepared remarks at an event in Washington. “However, if the evidence shows that the economy needs to be adjusted, I will support adjusting the policy stance.”

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Musalem said he supports the central bank’s decision to keep interest rates unchanged so far this year. His baseline outlook is that the unemployment rate will remain stable around its current level, economic growth will be close to potential, and core inflation will begin to gradually decline to 2% later this year.

If the labor market deteriorates and inflation does not rise, or if inflation falls, he may lean toward cutting rates. But if “core inflation or medium- to long-term inflation expectations continue to rise and deviate from 2%,” he would also support rate hikes.

“Allowing inflation expectations to lose their anchor would not only bring the risk of higher inflation, but also lead to slower economic growth and weaker labor markets,” he said.

Rising oil prices have pushed the U.S. average gasoline price above $4 per gallon this week, the first time since August 2022. The price increases are squeezing household budgets and weighing on consumer confidence.

Federal Reserve officials are assessing how a spike in energy prices resulting from attacks by the United States and Israel on Iran will affect inflation and the economy. Fed Chair Jerome Powell said on Monday that policy is in a favorable position, and officials can wait and see how the impact unfolds.

Policymakers held the benchmark interest rate unchanged for the second consecutive meeting last month. Based on the pricing of federal funds futures contracts, investors currently expect rates to remain unchanged for the rest of this year.

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