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

Andy Drennen: Economy is growing amid an inflation rate above Fed's target 2% rate.

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 this month 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. 

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

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.”

Federal Reserve Chair Jerome Powell spoke Oct. 14 at an event hosted by the National Association of Business Economics in Philadelphia and hinted that a couple more rate cuts could be coming this year, according to news reports. He said based on data the Fed has, the outlook for employment and inflation has not changed much since the FOMC’s September meeting.

Inflation and tariffs
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.”

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 the labor market could weaken by more than he’s currently expecting. 

Dual mandates
Musalem said the Fed has dual mandates of maximum employment and stable prices. To help achieve those, 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. 

The dual mandates of the Fed seem to be in tension, Musalem said, as inflation is running above the central bank’s target while the labor market appears to be at full employment.

“When you have that [tension], you have to follow a balanced approach,” he said. “A balanced approach for me means three things. It means arriving at a judgment about the probability of missing on either goal, employment or inflation; a judgment about the size of the potential miss and then judgment about the duration of that potential miss; and then setting policy in a way that balances that path between those two competing goals.”

Andy Drennen, vice president and senior portfolio manager at Simmons Bank, was among those in attendance at the chamber event. He said Musalem’s thoughts about tension with the Fed’s dual mandates were notable.

“The question is how do we balance lower rates and a growing economy with unemployment trending up? That’s a hard job that the Fed’s going to have to balance going into 2026,” Drennen said.

Announcements about tariffs in the first few months of the year led some companies to import a lot of goods in anticipation, Musalem said, noting higher imports subtract from the nation’s gross domestic product. As a result, he said the first-quarter GDP was down. According to U.S. Bureau of Economic Analysis data, Q1 GDP dipped 0.6% but rose 3.8% the following quarter as imports decreased.

“Third quarter is looking like it’s going to come in at a pretty healthy growth rate, something above 2%,” Musalam said of estimated GDP data expected to be released at the end of the month.

Drennen said Musalem’s insights about the economy align with his.

“What we’ve got right now is a growing economy,” Drennen said, noting economic analysts are predicting double-digit corporate earnings growth for the year and into 2026.

“There are more tailwinds than there are headwinds if we’re looking at the overall economy with stock markets, financial markets,” Drennen said, adding that his views are not necessarily those of Simmons Bank.

Decisions ahead
As for the government shutdown, which is extending into its third week, official jobs and inflation data may be delayed, officials say. However, news reports said the Department of Labor is recalling employees who were furloughed to prepare the release of the consumer price index for September. The bureau said that the CPI will now be released on Oct. 24, nine days after originally scheduled, to allow the Social Security Administration “to meet statutory deadlines necessary to ensure the accurate and timely payment of benefits,” according to information on the U.S. Bureau of Labor Statistics website.

“St. Louis Fed is going to conduct our own labor market survey to measure the unemployment rate for this month,” Musalem said. “So, we are working around it. Ideally, this data will begin to be produced again.”

Still, Musalem said he feels confident about the data available to make an informed decision at the next FOMC meeting.

“Through looking at alternative data sources and through having the pulse on the economy through conversations with folks around the country that I do, and all that the 12 reserve banks and reserve bank presidents are doing, I feel we have a pretty good sense of what’s going on,” he said.