Next year's ticket committee, St. Louis Fed President: Rate cuts may be paused as early as this month

On Wednesday, 2025 FOMC voting member and St. Louis Fed President Alberto Musalem stated that given the backdrop of inflation being higher than expected and concerns in the labor market easing, it may be time for policymakers to slow down the pace of interest rate cuts. Musalem expressed his preference for gradual rate cuts, supporting a patient approach and indicating that the risks of cutting rates too quickly outweigh the risks of easing too little: “It seems important to maintain policy options, and now may be the time to consider slowing the pace of rate cuts or pausing them to carefully assess the current economic environment, upcoming information, and the changing outlook.” When asked whether Fed officials should pause rate cuts at their meeting in two weeks, Musalem said: “The specific timing will depend on economic conditions, it could be December, it could be January, or it could be later.” He also noted that officials will be able to review more data on inflation, retail, and employment before making decisions this month. He will continue to monitor this data until he can determine his inclination. Musalem reiterated that the Fed is close to achieving its goals of employment and price stability, and monetary policy is well-positioned, with policy being “moderately restrictive.” Musalem: Expects inflation to converge towards the 2% target in the next two years Since September, Fed officials have cut rates by 75 basis points. Against the backdrop of fluctuating inflation data and ongoing positive signs in the labor market, some officials have called for cautious rate cuts. This year's voting member, Richmond Fed President Thomas Barkin, also stated on Wednesday that he supports a slower pace of rate cuts to bring policy to “some level of restriction”: “For me, normalization is a slower, more cautious path aimed at bringing rates down to neutral levels.” The Fed will hold its next meeting on December 17-18. Musalem stated that he expects inflation to converge towards the Fed's 2% target over the next two years. However, he added that data released since September shows that the risks of price increases “may stagnate or even reverse” are greater. Additionally, he stated that policymakers should proceed with caution, as it remains unclear what the neutral rate (the rate at which the Fed neither stimulates nor slows growth) is. He also mentioned that it is uncertain whether productivity growth can be sustained. Looking ahead to the Fed's upcoming long-term strategic framework assessment, Musalem indicated that while the strategic framework established by the Fed in 2020 was aimed at a situation where rates were near zero, the economic conditions have changed, and thus the Fed should adjust its strategy to fit the new economic environment: “I hope to see the Fed adopt an approach that ‘can adapt to different economic environments.’ The framework released in 2020 reflected concerns about rates being near zero at that time. Now, we are in a different world.”