Fed’s Musalem (St Louis) said the US economy is likely to grow at or above its potential in 2026, helped by fiscal support and the lagged effects of earlier rate cuts. He noted that inflation remains closer to 3% than 2% but is expected to ease over the year, arguing that policy is now around neutral and well positioned to respond in either direction as the labour market continues to cool in an orderly way.
I expect the economy to grow at or above potential in 2026.
Inflation is closer to 3% than 2%, but we anticipate it will ebb this year; the labour market is cooling in an orderly way.
Policy is in a good place to react in any direction.
Supported december rate cut because they saw a slightly higher risk to the labour market, moderating the risk of accelerating inflation.
Today’s inflation rate is encouraging for views that it will converge more towards 2% this year.
Monetary policy is now right around neutral.
See little reason for further easing of policy in the near term.
Materialising job market risks or a faster fall in inflation might make more cuts appropriate.
Unemployment rate is around the neutral rate of unemployment right now, with job growth around the breakeven point of 30K to 80K per month.
Unemployment claims, layoff announcements, and other metrics suggest the labour market is resilient.
There are robust tailwinds, including fiscal and lagged impacts of rate cuts, to spur growth.
Still see the risk that inflation will be more persistent than expected.
Goods and housing inflation should ease over the year.
It is inadvisable to have an accommodative policy at this point.
Hopeful that the US is in a higher productivity regime, but it’s too early to call it.
The Fed should not “outsource” its rate decisions to assumptions about productivity.
Companies are expressing “cautious optimism” about the economic outlook; consumption is “resilient”, and labour markets are “normalised”.
The Fed is committed to returning inflation to 2%.
The candidates for next Fed chair are all highly qualified.
The Fed operates on a regime of open debate and evidence; that won’t change under a new chair.
Don’t expect the Fed’s reaction function to change much under the new chair, given the breadth of opinion among 19 policymakers.
There are deeper issues around housing affordability and supply than mortgage interest rates.
QE is about removing duration; bill purchases right now are very short term.
Current situation stops well short of fiscal dominance or financing the government.
Source: https://www.fxstreet.com/news/feds-musalem-fed-policy-near-neutral-as-growth-outlook-remains-solid-202601131549
