Federal Reserve Bank of St. Louis President Alberto Musalem said it is critical for monetary policy to keep working to bring down inflation, arguing that the Fed should not ease policy in hopes of fostering higher productivity growth that might lower prices in the future.

In a speech prepared for delivery in São Paulo, Brazil on Thursday, Musalem said inflation remains well above the Federal Open Market Committee's 2% target and that the balance of risks is tilted toward inflation staying above target for a year or more. The remarks were his first public comments since last week's FOMC meeting, at which officials held the federal funds rate target range steady at 3.5% to 3.75%, leaving the benchmark at a level that continues to restrict economic activity as the central bank navigates the final stretch of its disinflation effort.

Musalem said it is crucial that monetary policy impose meaningful restraint on underlying inflation, rather than tolerating somewhat higher inflation today in pursuit of productivity growth tomorrow. He devoted much of his address to examining a potential trade-off in which the Fed keeps policy easier than it otherwise would be to allow for higher productivity, in the hope that this eventually feeds through to lower price pressures. The question has taken on added weight as advances in artificial intelligence and automation prompt debate over whether a sustained productivity surge could ease price pressures independently of monetary tightening.

He called such a move a mistake, saying the reasoning takes the central bank's credibility for granted. The trade-off only works, he argued, because households, firms, and investors keep expecting inflation to return to target. A central bank seen tolerating above-target inflation on the promise of a future productivity windfall can put that anchor at risk. Economists widely regard well-anchored inflation expectations as a cornerstone of effective monetary policy, since once households and businesses begin adjusting wage and pricing behaviour around persistently elevated inflation, the cost of restoring credibility rises sharply.

Musalem also struck a resilient note on the broader economy, saying it has performed well in recent months. He described the labour market as stabilised, with solid payroll growth and an unemployment rate close to its longer-run value. That combination — a steady jobs market alongside inflation still running elevated — underpins his argument that the Fed has room to prioritise price stability without leaning on labour market weakness as a reason to ease.

The remarks reinforce the hawkish posture Musalem signalled after the July FOMC meeting, framing any tolerance of above-target inflation as a direct threat to the Fed's credibility rather than a reasonable trade-off for potential productivity gains. Markets have continued to price expectations that policymakers will eventually need to lift rates further to bring down elevated inflation, a view Musalem's latest comments do little to discourage.

The previous day, San Francisco Fed President Mary Daly expressed support for the decision to hold rates steady at the July FOMC meeting, while Fed Governor Lisa Cook cautioned that the central bank is running out of room for disinflation to return. The spectrum of views underscores the challenge Chair Jerome Powell faces in building consensus as the committee weighs whether the current policy stance is sufficiently restrictive, with upcoming inflation reports and employment data likely to shape the debate ahead of the next policy meeting.

Source: ForexLive / InvestingLive