Fed's Musalem says tighter monetary policy needed to lower inflation
TLT•St. Louis Fed President Alberto Musalem said more monetary policy tightening will be needed to return inflation to the Fed’s 2% target, potentially with rate increases over the next six to nine months. He declined to say whether he would support a hike at the October meeting.
1. More tightening expected
Musalem said bringing inflation back to target in a timely manner will require further policy firming. If the goal is to return inflation to 2% within about 18 months, he said, rates may need to rise further over the next six to nine months. He said he had not prejudged the outcome of the October 27-28 meeting.
2. Yields and fiscal risks
Musalem described inflation as the economy’s primary problem amid strong growth and a stable job market, and said the Fed can likely lower inflation without denting hiring. He said financial conditions remain accommodative and supportive of growth despite rising bond yields, which he attributed to expectations for higher real rates, strong technology-sector investment and government borrowing needs. He called the federal government’s fiscal path unsustainable and said heavy borrowing could pose risks to the economy.
