Alberto Musalem, president of the Federal Reserve Bank of St. Louis, said on Thursday
The risks of excessive inflation and rising unemployment have now become balanced, and the Fed is ready to ease its tight monetary policy. This is another Fed official hinting that unless there is an unexpected economic shock, there is a high probability of a rate cut in September. Alberto Musalem said: The risk of rising inflation seems to have decreased, while the risk of further increases in unemployment seems to have increased. From my point of view, these two risks seem to be more balanced. The time to adjust to a moderately restrictive policy may be coming soon.
Alberto Musalem, who took over as president of the Federal Reserve Bank of St. Louis in April this year and will become a voting member of the Federal Open Market Committee (FOMC) next year, believes that there will be no recession in the near future, but a series of scenarios are still possible for the US economy. He expects the annual growth rate of real GDP to be between 1.5% and 2% in the second half of 2024. The US unemployment rate has climbed from a half-century low of 3.4% last year to 4.3% in July this year. Wage growth, service industry and commodity price inflation have also slowed down. The CPI in July increased by 2.9% year-on-year, the first time it has been below 3% since March 2021.
Alberto Musalem mentioned that the Fed still has some work to do to curb inflation. The labor market is normalizing and is no longer overheated. The tight labor market no longer seems to pose a significant upside risk to inflation. Market volatility does not affect decision-making. Regarding the recent volatility of US stocks, Alberto Musalem said that market volatility is not a concern of the Fed. He is only concerned about the extent to which volatility will tighten the financial environment, leading to higher corporate borrowing costs or stock issuance costs, or higher consumer credit costs.
If the volatility is large enough or lasts long enough, it will affect the financing ability of enterprises or households, and thus affect economic activity. But in Alberto Musalem's view, the recent peak of volatility has not met this standard and is unlikely to affect economic activity or the Fed's decision-making at present.
According to CME's FedWatch tool, the probability of the Federal Reserve cutting interest rates to 4.75% to 5% in September is 26%, down from 37.5% reported yesterday, while the probability of a rate cut to 5% to 5.25% has risen to 74%.
Previously, JPMorgan Chase pointed out that the Federal Reserve may cut interest rates by 50 basis points or 25 basis points in September. The key factor that will prompt the Federal Reserve to cut interest rates by 50 basis points is the rebound in the August non-farm payrolls report. If the increase in non-farm payrolls is only close to 100,000, there will be concerns about economic recession, which may lead to a larger interest rate cut.
It is worth noting that Federal Reserve Chairman Powell will deliver a speech on the economic outlook at the Jackson Hole Economic Symposium at 10:00 p.m. next Friday, and is expected to provide guidance on whether to cut interest rates in September. He said last month that if inflation and the labor market continue to cool, the Fed may consider cutting interest rates at its next meeting.
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