By Michael S. Derby
Aug 20 (Reuters) – Federal Reserve Bank of St. Louis President Alberto Musalem said on Thursday that while he is keeping an open mind about what sort of policy action he will recommend at next month’s central bank rate-setting meeting, he implied higher rates are still justified by how the economy is performing.
Monetary policy is “accommodative” right now and the inflation-adjusted federal funds target rate “is below where the committee believes the neutral long-run rate ought to be” at a time when “financial conditions are pretty accommodative here,” Musalem said in an interview on CNBC.
The official said inflation remains too high with underlying price pressures between 2.5% and 3% against the 2% inflation target, adding, “We need to bring inflation back down to 2% over the next 18 months.”
Musalem said he sees two main scenarios ahead of the central bank on inflation: One, it eases; the other, it stays sticky around current levels. He noted his view that inflation will not ease caused him to argue in favor of hiking what is currently a 3.5% to 3.75% federal funds rate at the late July meeting.
As for what he will call for at the September 15 to 16 Federal Open Market Committee meeting, Musalem said it depends on the data and “I want to maintain an open mind into every meeting.”
But he also reiterated, “More gradual interest rate increases are preferable, better, less disruptive than later, potentially larger, potentially more abrupt increases.”
(Reporting by Michael S. Derby; Editing by Chris Reese)
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