Musalem pushed for a 25bps hike at last week's FOMC, saying gradual tightening now is less disruptive than abrupt moves later. He said it's okay to surprise markets. The next meeting is Sept. 16-17.
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St. Louis Fed President Alberto Musalem said he favored a 25-basis-point rate increase at last week's Federal Open Market Committee meeting. He argued that acting gradually now would be less disruptive than waiting for a larger move later. Musalem is not a voting member of the FOMC this year, so his preference did not appear among the three formal dissents against the decision to hold rates steady.
Speaking in Brazil on Thursday, Musalem said inflation is likely to remain too high relative to the Fed's 2% target if policy stays unchanged. "Earlier gradual incremental interest rate increases are preferable, less disruptive, less costly than potentially later, more abrupt interest rate changes," he said.
He pushed back against the idea that the Fed should hesitate because financial markets are not positioned for higher rates. He closely monitors market signals, he acknowledged. Policymakers should follow their economic assessment regardless of what is priced in, he said. "If you think that now is the time to change policy in whatever direction, you ought to change that policy, irrespective of what's priced into markets," Musalem said. "There are times or moments when it's okay to surprise the market."
Investors have moved toward pricing a September hold. The shift followed falling oil prices and optimism about reopening the Strait of Hormuz. Musalem's comments add a hawkish counterpoint.
Musalem's broader argument was that the Fed has little reason to tolerate elevated inflation in the hope that stronger productivity eventually resolves price pressures. "It is crucial that monetary policy put a meaningful restraint on underlying inflation, rather than tolerating somewhat higher inflation today to pursue productivity growth tomorrow," he said. He warned there is "fertile ground for inflation expectations to potentially become unanchored."
Financial conditions are supportive. Asset prices are elevated. The labor market is posting "solid payroll growth," he said. He sees room to tighten before inflation becomes harder to contain.
Musalem's lack of a vote this year limited the dollar's reaction to his remarks, traders said. Traders reassessed the probability of a rate increase, pushing short-dated Treasury yields higher. They viewed Musalem's comments as adding to the hawkish pressure inside the Fed. The median view on the FOMC may not shift, they said.
The next FOMC meeting is scheduled for Sept. 16-17.
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