Fed can afford patience, productivity to shape rate-cut destination: Fed’s Musalem

Investing.com — St Louis Federal Reserve President Alberto Musalem suggested Wednesday that the Fed can take its time to gauge whether further rate cuts are needed, though said that if the recent pace of elevated productivity has staying power, rate cuts could accelerate.

“Given current economic conditions and the balance of risks, I believe the FOMC can judiciously and patiently evaluate incoming information in considering further lowering of the policy rate,” Musalem said in prepared remarks to the Economic Club of Memphis.

The St. Louis Fed president backed gradual adjustments of the policy rate toward a neutral level over time, provided inflation continues to fall toward 2%.

Still,, Musalem cautioned that the risk of the deflation trend stalling, or moving higher, has risen recently. He warned that easing monetary policy too much too soon could prompt an increase in demand that initially outpaces supply, further delaying the progress to push inflation toward the Fed’s 2% target.

Productivity, which measures the amount of output produced per unit of labor, will also hold sway on the rate cut path ahead, Musalem said, cautioning against reading too much into the recent elevated productive growth.

“Some reflection is prudent when it comes to relying on the recent elevated productivity growth to reconcile strong economic activity, a cooling labor market, and inflation that is above target but expected to fall,” he said.

If, however, recent productivity growth proves to have staying power, boosting the Fed’s battle against inflation. 

 “A structural assessment of recent productivity growth could lead to a faster pace of interest rate reductions, possibly with a higher neutral rate reached earlier,” Musalem said.

“A cyclical assessment could lead to a slower pace of rate reductions, possibly with a lower neutral rate reached later,” he added.