Fed's Musalem: Rate Cuts Off the Table With Policy at 'Neutral,' Economy on Solid Footing
WASHINGTON – The Federal Reserve may have reached a holding pattern on interest rates, according to one of its key policymakers. St. Louis Fed President Alberto Musalem stated Friday that further cuts are unnecessary with monetary policy now at a "neutral" level, barring a sudden downturn in the job market or a faster-than-expected decline in inflation.
In prepared remarks delivered at the University of Arkansas, Musalem placed the current policy rate range of 3.50%-3.75% in the neutral zone—neither stimulating nor restricting growth. He pointed to an economy growing above its long-term trend, supported by favorable credit conditions and fiscal policy acting as "tailwinds."
"I see tailwinds supporting economic growth," Musalem said. "With inflation still above our target and the risks to the outlook balanced, I believe it would be unwise to lower rates into accommodative territory at this juncture."
The official projected a gradual decline in inflation toward the Fed's 2% target from its current level, which remains about a percentage point higher. However, he acknowledged risks that elevated price pressures could prove persistent. On employment, Musalem noted a reduced risk of a "substantial deterioration" in the labor market, reinforcing the case for a patient stance.
The comments offer a clear signal that the central bank's rate-cutting cycle, initiated to counter high inflation, is entering a cautious phase. With the economy showing resilience, the debate is shifting from how much to ease policy to how long to maintain the current stance.
Michael Torres, Financial Analyst at Ridgeway Advisors: "Musalem is articulating the Fed's new consensus. The data-dependent pause is here. Markets should adjust expectations for rapid, successive cuts."
Dr. Lena Chen, Economics Professor at Carlton University: "Labeling policy as 'neutral' is a bold assessment. Given still-elevated core services inflation, one could argue policy remains restrictive. This framing seems designed to manage market expectations more than reflect pure economic reality."
David P. Miller, Small Business Owner (Retail): "'Tailwinds'? Tell that to my bottom line. My borrowing costs are still crushing me. The Fed is declaring victory on inflation way too early while Main Street continues to struggle. It's out of touch."
Sarah J. Whitmore, Former Fed Staffer: "This is a classic central bank communication strategy—telegraphing a prolonged hold to avoid reigniting inflationary psychology. The emphasis on balanced risks gives them optionality, but the bias is clearly toward inaction for now."
Reporting by Howard Schneider; Editing by Paul Simao