Senior Fed officials call for the resumption of gradual interest rate cuts!

St. Louis Fed President Moussalem is worried that looser financial conditions may stimulate demand and weaken anti-inflation efforts.

A senior Fed official said that the Fed should resume "gradual" interest rate cuts after an unusually sharp 50 basis points cut earlier this month.

Alberto Musalem, president of the St. Louis Fed, said that the US economy may respond "very strongly" to looser financial conditions, thus stimulating demand and prolonging its time to achieve the 2% inflation target.

Moussalem told the Financial Times last Friday: "For me, the measure to cut interest rates is to relax the brakes on the economy at this stage and let the policy gradually reduce restrictions."

In the forecast released earlier this month, he was one of the officials who expected the Fed to cut interest rates several times this year. Moussalem became the chairman of the St. Louis Fed in April and will become the voting committee of the Federal Open Market Committee (FOMC) next year.

Less than two weeks ago, the Federal Reserve abandoned the more traditional interest rate cut of 25 basis points to cut interest rates by 50 basis points to start the first easing cycle since the COVID-19 outbreak in early 2020. This huge interest rate cut will keep the federal funds rate between 4.75% and 5%. Federal Reserve Chairman Powell said that the move is aimed at maintaining the strength of the world's largest economy and avoiding a weak labor market when inflation falls.

Last Friday, the annual rate of PCE, the Fed's preferred inflation indicator, fell to 2.2% in August, which was more than expected. After the data is released, interest rate futures traders believe that the possibility of the Fed cutting interest rates by 50 basis points in November is slightly higher than the possibility of cutting interest rates by 25 basis points.

Moussalem supported a sharp interest rate cut in September. He admitted that the labor market had cooled down in recent months, but he was still optimistic about the prospects given the low rate of layoffs and the potential strength of the economy. He said that the business sector is in a "good condition" and business activities are generally "stable", adding that mass layoffs do not seem "imminent".

Nevertheless, he acknowledged that the Fed faced risks that might prompt it to cut interest rates faster. He said: "I realize that the economic weakness may exceed my current expectations, and so does the labor market. If this is the case, then it may be appropriate to speed up the pace of interest rate cuts. "

This echoed the comments made by Federal Reserve Governor Waller last week, saying that if the data weakened faster, he would be "more willing to actively cut interest rates". Musalem said that the risk of economic weakness or excessive growth has now been balanced, and the next interest rate decision will depend on the data at that time.

The latest "bitmap" of the Federal Reserve shows that most officials expect the policy interest rate to drop by another 50 basis points during the remaining two meetings this year. The next meeting will be held on November 6, the day after the US presidential election.

However, officials have different views, with two suggesting that the Fed should postpone further interest rate cuts, while the other seven predict that it will only cut interest rates by 25 basis points this year. Policymakers also predict that the policy interest rate will drop by another 100 basis points in 2025, ranging from 3.25% to 3.5% by the end of the year, and slightly below 3% by the end of 2026.

Moussalem refuted the statement that the 50 basis points interest rate cut in September was a "catch-up rate cut" because the Fed was too slow to loosen monetary policy, saying that inflation was falling much faster than he expected.

He said: "It is appropriate to send a strong and clear message to the economy that we are starting from a very favorable position."