Summary:

Amid strong economic expansion, a stable labor market, and inflation above the target level, Federal Reserve Chair Musalem supports maintaining the current interest rate range. He indicated that the Federal Open Market Committee (FOMC) may face conflicting dual objectives.

On February 20, the President of the Federal Reserve Bank of St. Louis, Alberto Musalem, delivered a speech at the Economic Club of New York, stating the following:

The U.S. economy is showing strength, with GDP levels and growth rates meeting or exceeding their long-term potential. Consumer spending remains a key driver of expansion, with personal consumption expenditures rising by a strong 4.2% in the fourth quarter, the highest rate for any quarter in 2024. Business confidence has improved over the past three months, accompanied by an increase in planned capital expenditures.

Inflation has declined significantly from its peak in mid-2022 but remains above the FOMC’s target. Recently, some measures of inflation expectations have risen. The January Consumer Price Index (CPI) report revealed significant monthly increases in the prices of goods, services, and housing, as well as in both core and headline inflation rates. Monetary policy remains moderately restrictive after a 100-basis-point rate cut, though less so than in the past six months. This shift may necessitate a more hawkish stance from the Federal Reserve.

The labor market remains strong, with employment risks broadly balanced, and recent indicators suggest some strengthening. Over the past three months, nonfarm payrolls increased by an average of 237,000 jobs, surpassing the breakeven rate. The unemployment rate has fallen to 4%. While job openings and quit rates have slowed, the layoff rate remains low. Although average hourly earnings and other measures of employment costs have shown growth, the labor market is not a significant source of inflationary pressure, as productivity has improved.

Overall, the risk of inflation expectations deviating from their path is high, given strong economic growth, a robust labor market, and supportive financial conditions. If inflation remains above the target level or expectations continue to rise, a more restrictive monetary policy stance may become necessary.