Senior Fed Official: “The Time for a Rate Cut is Approaching”

St. Louis Fed President Joseph Musallem said he believes the time for a rate cut is near. In his speech today, Musallem highlighted recent data that point to a positive shift in the inflation outlook and a balanced risk to the Fed’s dual mandate.

“The latest data has strengthened my confidence that inflation is declining and that the Fed is not behind the curve,” Musallem said in a speech in Louisville. Musallem believes inflation is on track to meet the Fed’s 2% target and that the labor market is no longer a risk to inflation.

Musallem noted that while services and housing inflation remained somewhat stubborn, he was optimistic about the overall trend. “From my perspective, the risks to dual mandates look more balanced,” he said. “So, as we get closer to the next meeting, a slight adjustment to the moderately restrictive policy may be about to become appropriate.”

The labor market is showing signs of cooling from overheating, according to Musallem. Layoff levels remain low, suggesting the labor market is no longer contributing to upside inflation risks.

Musallem, who touched on concerns that the Fed could be behind the curve, dismissed these views by pointing to the strong performance of the U.S. economy. Musallem, who stated that there was no recession on the horizon, predicted that GDP growth would be between 1.5% and 2% in the second half of the year.

“The economic growth momentum is good and the data does not support the view of a recession,” Musallem said, adding that future interest rates could be higher than pre-pandemic levels.

Musallem’s comments are in line with other Fed officials who support a rate cut at the Federal Open Market Committee (FOMC) meeting scheduled for Sept. 17-18. The development comes after a report from the U.S. Bureau of Labor Statistics showed that the annual core CPI rate slowed for a fourth straight month in July.

Despite a weaker-than-expected July employment report, Fed policymakers resisted calls for aggressive rate cuts, with investors now eyeing a 25 basis point cut in September, down from a 50 basis point cut previously.

Last month, the Fed left interest rates unchanged but hinted that a cut could be made soon. Fed Chair Jerome Powell said a rate cut could be appropriate as early as the central bank’s September meeting.

*This is not investment advice.