By Michael S. Derby
NEW YORK (Reuters) - St. Louis Federal Reserve President Alberto Musalem said on Wednesday he expects the U.S. central bank will be able to continue to cut interest rates but isn't ready to say what he thinks should happen at its policy meeting later this month.
With inflation likely to continue to ebb to the Fed's 2% target over time, "additional easing of moderately restrictive policy toward neutral will be appropriate over time," Musalem said at a Bloomberg monetary policy conference.
"Along this baseline path, it seems important to maintain policy optionality, and the time may be approaching to consider slowing the pace of interest rate reductions, or pausing, to carefully assess the current economic environment, incoming information and evolving outlook," he said.
Financial markets expect the Fed to cut its policy rate by a quarter of a percentage point from the current 4.50%-4.75% range at its Dec. 17-18 meeting, as it seeks to adjust the stance of policy to easing inflation and a better-balanced labor market.
Musalem said he needs to see more data before firming his view of what's needed at the meeting, saying "I'm keeping all my options open."
The longer-run outlook for policy, however, has grown less clear after President-elect Donald Trump's victory in last month's U.S. election. Trump ran on a platform of import tariffs, deportations of undocumented immigrants, and tax cuts, which could reignite inflation pressures and unsettle the economic landscape.
Musalem noted that the "textbook" understanding of tariffs points to higher prices and lower demand, but he noted he'll consider changes in government policies as they happen. He said none of that uncertainty argues against the central bank continuing to make forecasts.
He also said monetary policy is "well positioned" to deal with the economic outlook and the current restrictive stance is appropriate given that core price pressures remain above the Fed's 2% inflation target. Musalem noted that "in the current environment, easing policy too much too soon poses a greater risk than easing too little, or too slowly."
He said it could take another two years to get inflation to the central bank's target and added that a patient monetary policy stance is appropriate given the current level of inflation in a "strong" economy and job market that is at levels consistent with full employment.
Musalem said he expects growth to moderate toward the economy's long-term potential amid further labor market cooling and moderating compensation growth. "I expect the labor market will remain consistent with full employment while the unemployment rate rises modestly toward estimates of its natural rate," he added.
He also addressed the Fed's ongoing effort to shrink the size of its balance sheet through a process known as quantitative tightening, which has so far taken the central bank's holdings from a peak of about $9 trillion in the summer of 2022 to its current level of about $7 trillion.
"I expect the balance sheet will continue to roll off," but when it comes to the point where liquidity becomes too tight, "we're tying to find that point of transition. We don't know where that point is."