on suggests to me that the risk of inflation ceasing to converge toward 2%, or moving higher, has risen, while the risk of an unwelcome deterioration in the labor market has remained unchanged or possibly fallen.”
“Monetary policy is well positioned,” Musalem continued. “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. Future adjustments to the policy rate can be accelerated, slowed or paused as appropriate in response to new information about the outlook and risks for the price stability and employment objectives.”
Musalem said “the FOMC’s dual mandate goals of maximum employment and price stability are within sight,” but he cautioned, “it is appropriate for monetary policy to remain moderately restrictive while inflation remains above the FOMC’s 2% target.”
While monetary policy is “well positioned to return inflation to target and support maximum
employment through gradual adjustments of the policy rate toward a neutral level over time,” he qualified further rate reduction by adding “provided inflation continues to fall toward 2%.”
“There is more work to do,” he added.
While calling monetary policy still “restrictive,” he described overall financial conditons as “supportive” of economic activity despite the recent run-up in yields.
Musalem minimized threats to economic growth or employment, saying that the economy remains “near full employment” despite the rise in the unemployment rate to 4.1% in October.
He said various measures of labor market conditions “reveal a labor market that has cooled but has few signs of outright deterioration,” and he said the health of the business sector “provides some confidence that a disorderly labor market deterioration is unlikely.”
Musalem did acknowledge some signs of weakening in the labor market and said he will “remain attuned to the possibility of rising layoffs going forward.”
Wages have become less of a source of inflation pressure, he said.
Casting doubt on the 12,000 increase in October non-farm payrolls, he said he said “it’s hard to extract a signal” from that data and said he “would expect some of the weak employment data in October to rebound in November and December.
Musalem’s relative weighting of inflation and employment risks would seem to suggest a disinclination to cut rates aggressively.
His remarks came after the Labor Department reported that its consumer price index rose 0.2% in October, leaving it up 2.6% from a year earlier – a modest acceleration from the 2.4% September pace. The core CPI rose 0.3% or 3.3% from a year earlier.
Commenting on the report, Musalem told reporters he would like to have seen a lower core rate, as well as a smaller rise in service prices, and he made clear he will want to see more progress on reducing inflation to support additional rate cuts.
“Getting interest rates lower requires getting inflation sustainably back to 2%,” he said, adding that “inflation has been falling, though it remains above 2% …. Today’s release indicates that core consumer price index (CPI) inflation, at 3.6% and 3.3% on a three- and 12-month basis through October, also remains elevated.”
Echoing what Powell has said a number of times, Musalem warned that “easing too much too soon could prompt an increase in demand that initially outpaces supply, further delaying inflation convergence. It could also be counterproductive for maintaining full employment.”
“A rapidly declining federal funds rate could increase real or inflation risk premia along the yield curve, thereby adversely impacting the housing market and other interest-sensitive sectors that depend on capital market financing,” he went on.
On the other hand, Musalem stipulated that “easing too little too late could be associated with an unwelcome deterioration in the labor market, even as inflation remains on a course toward 2%.”
In a session with media, Musalem reiterated that “the recent data since the previous meeting suggests to me the economy is materially stronger than has been and thate the inflation data, whether PCE or CPI, all came in a little bit higher…”
The combination of “a stronger economy, slightly higher inflation,,suggest to me (inflation) risks are a little higher than 6 weeks prior to that,” he continued.
But he said that reading does “not necessarily” have monetary policy implications at this time.
“I think policy is well positioned … on a path toward neutral … The strength of the economy is likely to provide space for a gradual easing of policy with little urgency to try to understand and find where the neutral rate is.”
Schmid was noncommital in remarks to an Energy Conference hosted by the Federal Reserve Banks of Dallas and Kansas City.
He said, “the decision to lower rates is an acknowledgement of the Committee’s growing confidence that inflation is on a path to reach the Fed’s 2% objective—a confidence based in part on signs that both labor and product markets have come into better balance in recent months.”
But going forward, Schmid refused to prejudge how much further the FOMC should ease. “While now is the time to begin dialing back the restrictiveness of monetary policy, it remains to be seen how much further interest rates will decline or where they might eventually settle.”
Taking a longer view of factors that will influence monetary policy, Schmid said in prepared remarks, “Faster productivity growth could lead to relatively high interest rates and high growth; demographic trends point to low interest rates and slow growth; while debt dynamics suggest a combination of high interest rates and slow growth.”
“All three factors are likely to be in effect, and the outcome for interest rates and the economy will be determined by the balance between them,” he added.
Earlier Wednesday, Logan advocated a go-slow approach to further easing. Likening the economy to a ship coming into port, she said, “monetary policymakers need to be more prepared for winds and waves that could push us off course. Just like a ship captain, I think it behooves us to proceed cautiously at this point ….”
“(W)e’re in sight of the shore: the FOMC’s congressionally mandated goals of maximum employment and stable prices,” she said. “But we haven’t tied up yet, and risks remain that could push us back out to sea or slam the economy into the dock too hard.”
Logan listed both upside risks to inflation and downside risks to employment, but she focused more on the former. Pointing to September’s 2.7% annual rate of increase in the PCE price index, she said that “suggests we’re not quite back to price stability yet.”
Logan also raised doubt about whether the funds rate needs to be cut all the way to 2.9% to reach “neutral.” Indeed, she said it’s possible the funds rate is already near neutral.
“A strategy of repeatedly lowering the fed funds target range toward a more neutral level relies on
confidence that the neutral level is materially lower than where rates are now,” she said, but “when I look at the available evidence, though, I see substantial signs that the neutral rate has increased in recent years, and some hints that it could be very close to where the fed funds rate is now.”
Logan noted that estimates of the neutral real interest rate range from 0.74% to 2.60%. Adding in the 2% inflation target yields a neutral fed funds rate of 2.74 to 4.60%.
“Following last week’s rate cut, the fed funds rate stands today at 4.58 percent, right at the top of that range,” she said, adding that “If we cut too far, past neutral, inflation could reaccelerate and the FOMC could need to reverse direction. In these uncertain but potentially very shallow waters, I believe it’s best to proceed with caution.”
Logan concluded that “the FOMC will most likely need more rate cuts to finish the journey,” but she said, “it’s difficult to be sure how many cuts may be needed and how soon they may need to happen.”
Ahead of the CPI report, Minneapolis Fed President Neel Kashkari told a Yahoo Finance conference Tuesday that if inflation were to surprise “to the upside” before the Dec. 17-18 FOMC meeting, “that might give us pause.”
Also Tuesday, Richmond Fed President Tom Barkin, a current voter, played it close to the vest regarding future policy moves. He said “the FOMC has started the process of recalibrating rates to somewhat less restrictive levels. With inflation close to target and unemployment near its natural rate, the fed funds rate seemed like the one number out of sync….”
“With the economy now in a good place and interest rates off their recent peak but also off their historic lows, the Fed is in position to respond appropriately regardless of how the economy evolves,” Barkin went on to tell a Baltimore Together Summit.