St. Louis Fed President: Current interest rates remain accommodative, the Federal Reserve may need to further raise rates

According to Jinse Finance APP, St. Louis Fed President Musalem stated that further rate hikes may be needed to achieve the Federal Reserve's 2% inflation target. He believes that even though the Fed raised rates this month, the current monetary policy might still be stimulating the economy.

In a media interview on Monday, Musalem said that persistent strong demand and recurring supply-side factors are jointly keeping inflation risks elevated. In his view, without further tightening of monetary policy, the likelihood of inflation remaining significantly above the Fed's 2% target over the next 18 months is higher than the possibility of inflation returning to the target level.

This stance further reinforces the recent hawkish policy signals released by the Federal Reserve. Last week, Fed officials unanimously voted to raise interest rates, marking the first rate hike by the central bank in over three years. After this increase, the federal funds rate target range rose to 3.75%-4%. At the same time, the Fed officials' latest rate projections indicate there could be one more rate hike within the year.

Fed Chair Walsh stated after the meeting that this rate hike aims to withdraw some degree of policy accommodation and help bring inflation back to the 2% target more quickly.

Despite the Fed starting to hike rates, Musalem believes the current level may still be insufficient to impose a clear restraint on economic activity. He noted that the current 3.75%-4% federal funds rate target range is still on the "accommodative side." This judgment implies that, in Musalem’s view, current monetary policy may still be stimulating the economy to some extent, rather than sufficiently curbing economic growth and inflation.

If more Fed officials agree with this assessment, it would suggest this round of interest rate hikes may not be a one-off policy move, but rather the start of further monetary tightening.

Musalem is not a voting member of the Federal Open Market Committee (FOMC) monetary policy decisions this year, but he still participates in policy discussions.

He also emphasized that, rather than waiting for inflation pressures to worsen before taking more drastic action, raising rates earlier and gradually may cause less disruption to the economy. In other words, Musalem prefers to tighten policy in smaller, more gradual steps before sustained inflation risks become more pronounced, reducing the likelihood of having to make larger rate hikes in the future.

Musalem's latest remarks also reflect that the Fed's current focus is shifting from simply observing inflation levels to assessing whether price pressures are persistent.

Previously, Fed Chair Walsh stated at the September policy meeting press conference that Middle East conflicts and rising energy prices have recently added to inflation pressures, but the Fed needs to pay attention not just to one-off price shocks, but also whether these shocks spread to other goods and services and impact the public’s inflation expectations.