– Musalem, Others See No Rush to Change Monetary Policy
By Steven K. Beckner
(MaceNews) – Federal Reserve officials have continued this week to speak in a patient, cautious vein, strongly suggesting they see no need to rush to ease monetary policy in a climate of heightened uncertainty.
Fed officials have largely echoed Fed Chair Jerome Powell in signaling they would prefer to take a wait-and-see approach until there is greater “clarity” on how the Trump administration’s tariff and other policies affect the economy.
Uniformly, they have also stressed the need to keep inflation expectations under control to give the Fed latitude to address the economy’s needs.
Most recently, early afternoon Tuesday, St. Louis Federal Reserve Bank President Alberto Musalem said the current “moderately restrictive” monetary policy is “well-positioned” to respond to changes in economic growth, labor market conditions and inflation, but he stressed there is great uncertainty about the outlook.
Musalem, a voting member of the Fed’s policy-making Federal Open Market Committee, said the FOMC must be prepared to respond to different scenarios – one, in which tariff hikes have “only a modest and temporary impact on inflation;” a second in which tariffs both hurt growth and boost inflation, and a third, in which the trade war “deescalates” and returns the economy to its previous path.
If the Fed’s dual mandate goals of maximum employment and price stability diverge, he said the FOMC might have to take a “balanced approach” to policymaking, moving rates to respond to which goal is furthest from target.
Other Fed officials have made similar comments.
On May 7, for the third straight meeting, the FOMC left the federal funds rate in a target range of 4.25% to 4.5%. after cutting that policy rate 100 basis points over the last three meetings of 2024.
The FOMC’s policy statement continued to describe economic activity and labor markets as “solid,” but took note of “further” increases in uncertainty. And the FOMC made a notable alteration to its balance of risks language to suggest stagflation is becoming a greater danger, saying it “judges that the risks of higher unemployment and higher inflation have risen.”
Referring to that new language, Powell warned, “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension.”
But for the time being, the Fed chief said, “we are not in this situation,” In fact, “the economy is growing at a solid pace, the labor market appears to be solid. Inflation is running a bit above 2%. So it’s an economy that’s been resilient and in good shape ….”
“And so we think that leaves us in a good place to wait and see,” Powell said. “We don’t think we need to be in a hurry. We think we can be patient.”
Other Fed officials have since been singing from the same sheet music.
A case in point is Musalem. Speaking to the Economic Club of Minnesota in Minneapolis Tuesday, he said, “the U.S. economy continues to exhibit underlying strength. Despite some cooling, the labor market has shown resilience and remains at or near full employment. Inflation has continued to ease but remains above the FOMC’s 2% target….”
Musalem said, “monetary policy is well positioned to respond in a timely way to economic developments and greater clarity about the outlook.”
“Should tension between our dual mandate goals arise, I believe a balanced response to both inflation and employment is feasible—provided the public continues to expect inflation will return to 2%,” he continued.
But Musalem emphasized, “Ultimately, well-anchored medium- to long-term inflation expectations are necessary for achieving both price stability and maximum employment for the American people.”
Lately, concerns about inflation expectations have mounted. Not only have short-term inflation expectations risen, but so have some measures of longer-term inflation expectations. On Friday, the University of Michigan consumer sentiment survey showed five-year inflation expectations climbing to 4.6% in May from 4.4% in April, and up from 3.0% a year ago.
Atlanta Fed President Raphael Bostic said Monday, he “worr(ies) a lot about the inflation side, and mainly because we’re seeing expectations move in a troublesome way.”
Fed officials are not prepared to decide what, or when, the FOMC’s next decision will be. They are waiting to see how tariff and other policies play out.
As Musalem said, “economic policy uncertainty is high, which makes the path of the economy especially difficult to project. New trade, fiscal, regulatory and immigration policies and other factors will affect the outlook in different ways and on different time horizons, and it will be important to consider their net total effects.”
He said the tariff increases announced on April 2 and the retaliation that followed “seem likely to have a significant impact” and are “likely to dampen economic activity and lead to some further softening of the labor market,” while also having direct effects on import prices and indirect effects on other prices.
But Musalem said that how monetary policy should respond will depend on exactly how the economy responds. He outlined two main scenarios, as well as a third possibility.
In the first scenario, he said, “tariffs could have only a modest and temporary impact on inflation concentrated in the remainder of 2025, as businesses run down inventories and pass tariffs onto customers as one-off price increases. The effects of higher tariffs on economic activity might slow aggregate demand and thus dampen some of the inflation.”
“Under this scenario, a monetary policy of looking through the temporarily higher inflation and possibly easing policy to counter negative effects on employment could be appropriate,” Musalem said, although he cautioned that “looking through” could run the risk of “underestimating the level and persistence of inflation.”
In his second scenario, Musalem said, “it seems at least equally likely that the inflationary impetus from higher tariffs could be more persistent” for several reasons, including the fact that “the pre-tariff starting point for inflation is above target” and “the recent period of high inflation likely has raised the public’s sensitivity to it.”
In the second scenario, Musalem said “a balanced monetary policy that is responsive to deviations of inflation from target and to employment shortfalls will be appropriate, provided that longer-term inflation expectations are well anchored.”
“Otherwise, it will be necessary to focus on a policy path that returns inflation to 2% and inflation expectations to levels consistent with our inflation target, he added.
The “balanced approach” mentioned by Musalem and others refers to a section of the Fed’s Statement on Longer-Run Goals and Monetary Policy Strategy, which specifies that if the FOMC determines that its maximum employment and price stability objectives are “not complementary, it takes into account the employment shortfalls and inflation deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.”
In other words, if inflation is closer to target than unemployment, the FOMC would focus first on reducing unemployment.
In addition to those two scenarios, Musalem allowed for a third possibility: “Conceivably, …. ongoing trade negotiations will durably de-escalate trade tensions and lead to a resumption of global trade flows with only a modest reconfiguration of supply chains. If that were to happen soon, the U.S. economy could remain close to the path that it was on—one with a resilient labor market and ongoing convergence of inflation to target.”
In those circumstances, he said, “the current stance of monetary policy, which is focused on bringing inflation back to 2% in the context of a full employment labor market, will remain appropriate.”
For now, though, as market bets on the number of 2025 rate cuts fluctuate, officials generally are keeping their powder dry, while they await “clarity” on the impact of tariff, fiscal and regulatory policies.
Bostic has been more outspoken than most. “For me right now, I’m expecting it’s going to take a bit longer for that to sort out…,” he said Monday. “I’m leaning much more into one cut this year, because I think it will take time, and then we’ll sort of have to see.”
New York Fed President John Williams suggested on Monday rate cuts could be delayed beyond the FOMC’s next scheduled meeting of June and perhaps longer.
“It’s not going to be that in June we’re going to understand what’s happening here, or in July,” the FOMC vice chairman said Monday at a Mortgage Bankers Association conference. “It’s going to be a process of collecting data, getting a better picture, and watching things as they develop.”
Minneapolis Fed President Neel Kashkari, an FOMC voter, also spoke of the “solid” condition of the economy and the progress made against inflation, but said tariffs have thrown the Fed a “curve ball.”
“There’s a lot of uncertainty that we’re trying to navigate,” Kashkari said. So, “it’s really just wait and see until we get more information.”
Federal Reserve Board Vice Chair Phillip Jefferson, meanwhile, said “Given the level of uncertainty that we’re facing right now, I believe that it is appropriate that we wait and see how the policies evolve over time and their impact.”
Echoing Powell, Jefferson said monetary policy is in a “very good place.” Jefferson spoke more extensively about monetary policy last Wednesday. Calling the 4.25-4.50% funds rate target range “moderately restrictive,” he said he “view(s) the current stance of policy as well positioned to respond to developments that may arise.”
Hinting at greater concern than some about potential economic weakness, he noted, “Various measures of consumer and business sentiment have declined sharply this year, and I will be watching very carefully for signs of weakening economic activity in hard data.”
Jefferson called the labor market “solid,” but said he is “watching for signs that the labor market could cool as tariff increases begin to weigh on economic activity.”
As for the “price stability” mandate, he said “recent data are consistent with further progress toward our 2% inflation target; however, that goal has not yet been reached.” And he warned, “ If the increases in tariffs announced so far are sustained, they are likely to interrupt progress on disinflation and generate at least a temporary rise in inflation.”
Also last Wednesday, San Francisco Fed President Mary Daly agreed that monetary policy is “in a good position” to respond to “whatever comes” from what she called “an uncertainty shock.”
Declaring that the Fed has the economy “exactly where we want to be” with “solid” growth and employment and “declining inflation,” she said, “the word of the day is patience — patience to see, not guess.”
Jefferson and Daly spoke following a favorable inflation report from the Labor Department, whose consumer price index rose 0.2% in April — 2.3% from a year earlier – less than expected and lowest since February 2021. The “core” CPI also rose 0.2% or 2.8% year-over-year. But the apparent moderation of inflation was considered suspect until more fulsome tariff effects register in prices.
Later Tuesday, at a conference sponsored by the Atlanta Fed, Bostic warned of an impending wave of price increases that should keep the Fed on hold.
“One thing that we’ve heard is that a lot of the tariff impact to date has actually not shown up in the numbers yet,” Bostic said. “There’s been a lot of front-running, building inventories and all those sorts of things. And we are hearing from an increasing number of businesses that those strategies … are starting to run their course.”
“If these pre-tariff strategies have run their course, we’re about to see some changes in prices, and then we’re going to learn how consumers are going to respond to that,” he continued while at the conference in Amelia Island, Florida.
So Bostic said “We should wait and see where the economy is going before we do anything definitive.”
At the same conference, Cleveland Fed President Beth Hammack had a similar take: “I think the best action we can take is to sit on our hands and really carefully go through the data, engage with our communities, hear what they’re thinking about, hear about the choices that they’re making, and see how that all comes together.”