St. Louis Fed CEO stresses caution for further rate cuts this year

While the Federal Reserve made its first interest rate cut of the year last month, one of those involved in the central bank’s decision said at a Springfield event on Oct. 10 he is open-minded yet cautious about making any similar moves before year’s end.

Alberto Musalem, president and CEO of the Federal Reserve Bank of St. Louis, made his first visit to the Queen City last week to speak at the Springfield Area Chamber of Commerce office as part of its public policy speaker series. He covered topics such as the Federal Reserve’s role, factors that guide its policy decisions and the current economic landscape.

In terms of the current status of the economy, Musalem said inflation is materially above the central bank’s target.

“It’s running at 3% when our target is 2%,” he said. “Some of that is tariffs. Our team estimates that only about two-tenths, maybe three-tenths, of the 3% is tariffs. So only about 10% of the inflation that we’re seeing so far is tariffs. On the other side, the economy today has a labor market that looks like it’s at full employment. When you look at the surface, though, there is some risk that the labor market could weaken. So that’s the economy. Those are the facts today.”

The impact of tariffs on inflation should fade after the next two or three quarters, Musalem said. 

“By the second half of 2026, I expect tariffs to have played themselves through the economy, for prices to have increased and then to stop increasing after that, at least due to tariffs,” he said, adding that inflation should then head toward the 2% target rate.

However, Musalem did concede there are material risks around the baseline projection, as inflation could remain persistent as 2026 moves on or that the labor market could weaken by more than he’s currently expecting.

Musalem said the Fed has dual mandates of maximum employment and stable prices. To help achieve that, he said he and his team at the St. Louis Fed continuously look at a lot of hard data from government, international and privately produced sources. Additionally, he has conversations with people across the country on their experiences with issues such as the labor market, inflation and financial conditions. He also consults financial markets frequently.

“I combine all that together to form an outlook to understand and balance the risks around that outlook and then to think about what the right policy ought to do,” he said.

Musalem also recapped recent major developments from the St. Louis Fed, one of 12 regional reserve banks in the Federal Reserve system.

Musalem, who began his leadership role with the organization in April 2024, also helps shape monetary policy as a member of the Federal Open Market Committee. He also oversees operations of the Eighth Federal Reserve District, which comprises all or parts of seven states, including much of Missouri, and has branches in St. Louis; Little Rock, Arkansas; Louisville, Kentucky; and Memphis, Tennessee.

Musalem said he was among the Fed officials who supported a quarter percentage-point cut at the Sept. 16-17 FOMC meeting. The reduction took the federal funds rate down to a target range of 4%-4.25%.

“I supported a 25-basis point reduction in the policy rate as a way to provide insurance against labor market weakening while continuing to lean against inflation,” he said of the September meeting decision. “I now perceive monetary policy is somewhere between modestly restrictive and neutral. And I see, when I look out the window, financial conditions and financing conditions which are very accommodative of a growing economy.”

Musalem said he is keeping an open mind about potentially further reducing interest rates as additional insurance against labor market easing. The next FOMC meeting is Oct. 28-29, and it will meet for the final time this year Dec. 9-10.

“I believe that we have to tread with caution because there’s limited room for further easing before monetary policy could become overly accommodative,” he said. “I believe that monetary policy should continue to be against persistence and inflation, whether that persistence comes from tariffs, from the lower growth of labor supply or for any other reason.”

An expanded version of this article is scheduled to be published in Springfield Business Journal’s Oct. 20 print edition.