By Michael S. Derby
Oct 30 (Reuters) – St. Louis Federal Reserve President Alberto Musalem said on Friday he sees an imminent need to raise interest rates to deal with ongoing high levels of inflation.
“I judge that additional firming of monetary policy will be necessary, and soon,” Musalem said in the text of a speech to be presented at an event held by the Shadow Open Market Committee, a group that takes stock of Fed actions and policies.
“Incremental adjustments made earlier are usually less disruptive than larger and abrupt actions taken later,” he said, adding that “moving sooner in smaller steps while inflation expectations are anchored has a better chance of succeeding without adverse impact on the labor market or economic growth.”
Musalem said that inflation remains too high relative to the 2% target with ongoing risks to the upside, and added that it was unlikely to ease absent Fed action. He noted that monetary policy is not in a position to lower inflation at the current moment.
“I believe that monetary policy and financial conditions remain accommodative. Financial conditions tightened recently,” Musalem said.
The Fed left its policy rate unchanged in the 3.75%-4.00% range after a meeting this week, as had been widely expected. The Fed raised rates in September, and financial markets expect another increase in short-term borrowing costs at the December meeting.
Musalem does not currently have a vote on the Fed’s policy-setting committee, but will be a voter in 2027. Ahead of this week’s policy meeting, Musalem had expressed support for higher rates to deal with high price pressures, in an economy where thus far, financial conditions are not providing the restraint needed to bring inflation back to the goal.
Two Fed policymakers dissented this week in favor of a rate hike.
“I’m encouraged by the progress we’ve made in a short period of time” on lowering inflation, Fed Chairman Kevin Warsh said in a press conference after this week’s meeting, while acknowledging that the central bank had not yet achieved price stability.
Warsh, who has been reluctant to provide guidance about the interest rate outlook, did not say what he thought the Fed would do at the December 8-9 policy meeting.
(Reporting by Michael S. Derby; Editing by Paul Simao)
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