Fed’s Musalem says limited room for further rate cuts

By Howard Schneider

WASHINGTON (Reuters) -St. Louis Federal Reserve President Alberto Musalem said on Monday he supported the rate cut at last week’s Fed meeting as a precautionary move to protect the job market, but said there may be “limited room” for further reductions given inflation above the Fed’s 2% target.

“I supported the 25-basis-point reduction in the FOMC’s policy rate last week as a precautionary move intended to support the labor market at full employment and againstfurther weakening,” Musalem said in remarks prepared for delivery at the Brookings Institution in Washington D.C.

“However, I believe there is limited room for easing further without policy becoming overly accommodative, and we should tread cautiously.”

Musalem is a voter on interest rate policy this year, and said he still feels the risk of more persistent inflation above the Fed’s target means the benchmark interest rate needs to remain high enough to offset the risk of rising prices.

Consumers are still spending, growth has slowed but remains near trend, and other factors like loose financial conditions support economic activity, he said.

Tariffs are adding to inflation, and while the impact has been less than expected the full effect may not be felt for several more months as firms adjust prices, he added.

“Monetary policy should continue to lean against persistence in above-target inflation,” Musalem said. While there may be risks to the unemployment rate, unless those start to materialize “overemphasizing the labor market…could do more harm than good.”

Fed officials last week were closely divided over the need for further rate cuts this year. While the median projection is for two more quarter-point reductions by the end of 2025, seven policymakers see no more cuts as appropriate.

(Reporting by Howard Schneider; Editing by Andrea Ricci)