On Wednesday, 2025 FOMC voter and St. Louis Fed President Alberto Musalem said that in the context of inflation higher than expected and concerns about a weakening labor market, policymakers may be considering slowing down the pace of interest rate cuts.

Musalem stated that he leans towards gradually lowering interest rates, supports a patient approach, and believes that the risk of cutting rates too quickly is greater than the risk of easing too little:

"Maintaining policy options seems important, and now may be the time to consider slowing down or pausing the rate cuts to carefully assess the current economic environment, forthcoming information, and ever-changing prospects."

When asked whether Fed officials should pause rate cuts at the meeting in two weeks, Musalem said:

"The specific timing will depend on the economic situation, it could be December, January, or later."

He also pointed out that officials will be able to review more data on inflation, retail, and employment before making a decision this month. He will be closely monitoring this data until he can determine his inclination.

Musalem reiterated that the Fed is close to achieving its goals of employment and price stability, monetary policy is well-positioned, and the policy is "moderately restrictive".

Musalem: It is expected that inflation will approach the target of 2% in the next two years.

Since September, Federal Reserve officials have cut interest rates by 75 basis points. Against the background of fluctuating inflation data and continued positive signs in the labor market, some officials are calling for cautious rate cuts.

This year, Richmond Federal Reserve Chair Barkin also stated on Wednesday that he supports a slow pace of rate cuts to bring policy to a 'certain degree of restrictive level':

"For me, normalization is a slower, more cautious path aimed at bringing rates to a neutral level."

The Federal Reserve will hold its next meeting on December 17-18. Musalem stated that he expects inflation to approach the Fed's 2% target over the next two years.

However, he added that data released since September shows a greater risk of price increases 'stalling, or even reversing.'

Furthermore, he stated that policymakers should proceed with caution as it is still unclear what the neutral interest rate (the rate at which the Fed neither stimulates nor slows down growth) is. He also noted that the sustainability of productivity growth is uncertain.

Looking ahead to the long-term strategic framework assessment that the Federal Reserve is about to undertake, Musalem stated that while the strategic framework formulated by the Fed in 2020 was aimed at a situation where rates were close to zero at that time, the current economic situation is different. Therefore, the Fed should adjust its strategy to adapt to the new economic environment:

I hope to see the Federal Reserve adopt a 'global strategy that can adapt to different economic environments.' The framework released in 2020 reflected concerns about interest rates approaching zero at that time. Now, we are in a different world.

Editor/Somer