St. Louis Fed President: Further rate hikes needed over the next 6 to 9 months; inflation remains the top issue for the US economy

According to Zhitong Finance APP, St. Louis Federal Reserve President Musalem stated on Thursday that in order to bring U.S. inflation back to the 2% target in a timely manner, the Federal Reserve still needs to further raise interest rates. However, he did not explicitly support taking action at the monetary policy meeting later this month, emphasizing that future rate decisions will continue to depend on economic data.

Musalem said at an event held in New York that “in order to bring inflation back to the target level in a timely manner, monetary policy still needs to be further tightened.” He further explained that if the Federal Reserve hopes to bring inflation down to 2% over about 18 months, it may need to continue raising rates at appropriate times over the next 6 to 9 months.

However, when asked whether the Federal Reserve should raise rates at the meeting on October 27-28, Musalem did not give a clear answer. He stated, “I keep an open mind at every meeting. I won’t prejudge what decision the meeting will make, nor will I pre-determine my own position.”

Musalem also emphasized that from an overall perspective, the current inflation situation still requires the Federal Reserve to consider further tightening monetary policy.

It is worth noting that Musalem is not a voting member of the Federal Open Market Committee (FOMC) responsible for setting interest rate policy this year, but his comments still reflect the Federal Reserve’s internal focus on inflationary pressures and the necessity for future rate hikes.

At its meeting on September 15-16, the Federal Reserve raised interest rates, increasing the federal funds rate target range to 3.75% to 4.00%. This was the first rate hike by the Federal Reserve in three years. The officials’ rate forecasts released at that time also indicated that one more rate hike is expected before the end of the year.

However, the market’s prediction on the timing of the next rate hike has recently changed. Previously, traders believed that the Federal Reserve was likely to raise rates again in October. But New York Fed President Williams last week said that there is no need for the Federal Reserve to rush into action while assessing the latest economic data. Subsequently, Fed Vice Chair Jefferson also stated that there is currently no urgent need for another immediate rate hike.

Affected by these remarks, the market now generally expects the Federal Reserve to keep rates unchanged at the October meeting and delay the next rate hike until December.

Regarding the outlook for the U.S. economy, Musalem believes that with strong economic growth and a generally stable labor market, inflation remains the primary issue facing the U.S. economy. He said the Federal Reserve is likely to further lower inflation without significantly harming the job market, and returning inflation to a 2% target will benefit the overall economic performance.

Musalem also pointed out that despite the obvious rise in U.S. Treasury yields recently, the overall financial environment remains relatively loose and continues to support economic growth. He believes that higher bond yields do not mean investors are losing confidence in the Federal Reserve. On the contrary, this more reflects market expectations for higher real interest rates and increasingly intense competition for capital in a strong economic environment.

Musalem specifically mentioned that the tech industry's continued investment expansion, as well as the large-scale financing needs of the U.S. government, are important factors supporting high bond yields.

As capital expenditures in areas such as artificial intelligence continue to increase, tech companies' demand for capital keeps growing. At the same time, the U.S. government’s large-scale borrowing to meet fiscal spending needs has further intensified the pressures of supply and demand in the capital markets.

When discussing the U.S. fiscal situation, Musalem issued a warning, saying that the federal government's long-term fiscal trajectory is unsustainable. He stated, “For most of the past two decades, the U.S. federal government has been on an unsustainable fiscal path.”

Musalem pointed out that persistent high levels of government borrowing could pose risks to the U.S. economy. Although there has not yet been an obvious crisis of market confidence, the enormous government financing demand remains a cause for concern.