Musalem on Rate Cuts: Fed Needs to 'Tread With Caution'

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Transcript

00:00We hear a lot from your colleagues. We heard from Chair Powell about the risk of cutting too fast

00:05versus the risk of not cutting soon enough. What about the risk to credibility if you cut,

00:12but then inflation doesn't go down and you have to start thinking about raising rates again?

00:17As Chair Powell said, there's no risk-free path. And if we focus too much on the labor market and

00:24then cut too aggressively, we can have an undesired outcome on the inflation side. If

00:29we focus too much on the inflation side and the labor market deteriorates, we're going

00:33to have an undesired outcome. And so right now, what our monetary policy strategy document

00:41says is that when you have some tension between your two goals, you have to follow a balanced

00:46approach, which is to steer monetary policy to attend to both goals.

00:52Well, which way would you steer it in December based on what you know now?

00:56I think, again, it's very important that we tread with caution here. I think there is

01:03limited room to ease policy further without policy becoming overly accommodative. Monetary policy,

01:12in my estimation, is somewhere between modestly restrictive and neutral, probably closer to

01:17neutral. If you look at the real federal funds rate, it now is around 1%. And 1% happens to be

01:26the long-run neutral rate in real terms for the federal funds rate of the entire committee,

01:32the median, I should say, of the entire committee. So I think we need to continue to lean against

01:38inflation to make sure we bring inflation back down towards our 2% target while providing

01:43some insurance to the labor market. One thing I hear often when I visit with folks in my district

01:47is that people are having more month than money, increasingly. Number one. Number two, I hear that

01:56folks are increasingly going to food pantries, including middle-income folks. And I hear that

02:03aid institutions are increasingly getting requests for utility assistance, probably related to higher

02:11electricity and energy prices. I should say electricity prices. So those three things tell me that it's

02:16really important that we bring inflation back towards 2% to allow households to catch up with

02:20their real incomes.