Fed's Musalem: Hiking rates now could save more aggressive action later

Federal Reserve Bank of St. Louis President Alberto Musalem is crossing the wires with remarks on the economy and the monetary policy outlook, speaking in an interview with CNBC on Thursday.

Musalem flags upside inflation risks, keeps Dollar bulls alert despite cautious tone shift

Fed’s Musalem delivered a moderately hawkish-leaning message, with a 7/10 FXS Speechtracker score that is in line with the speaker’s historical average, but the emphasis on neutral-to-accommodative policy and “pretty accommodative” financial conditions tempers the tone.

The key remark that underlying inflation running between 2.5%-3% is “too high,” and that hiking now could avoid more aggressive action later underscores upside inflation risks and a bias toward pre-emptive tightening, even as Musalem stresses Fed credibility and independence from fiscal policy. References to strong growth, recovering productivity, and potential supply shocks such as a “super El Nino” reinforce a narrative where inflation risks remain front and center, keeping the Dollar supported on dips.

The FXS Fed Sentiment Index slipped 0.34 points to 132.42, signaling a modest pullback in perceived hawkishness from the prior reading despite the still-strong focus on inflation. With the index firmly above the 100 neutral line, the Fed remains in hawkish territory even after this slight sentiment cooling, suggesting markets will continue to price a non-trivial probability of further tightening, in line with Musalem’s warning that current rates may not be sufficient to reliably return inflation to 2%.

Key quotes:

Strong growth and investment are influencing the bond market.

Fed credibility is not in question.

The Fed is focused on making monetary policy independent of fiscal policy.

Monetary policy is neutral or accommodative right now.

Financial conditions are pretty accommodative here.

The number one concern of the public is inflation.

Businesses are facing high input costs.

A super El Niño might be the next supply shock.

Given current Fed rates, sees a lower probability of getting inflation back to 2%.

Hiking rates now could save more aggressive action later.

Underlying inflation is between 2.5% and 3%, is too high and must be lowered.

Productivity is seeing a recovery.

The best thing the Fed can do for growth is get inflation back to 2%.

Some parts of the economy are seeing credit getting crowded out.

Forward guidance is useful when rates are at zero.

Forward guidance suggests commitment; communicating a framework is different.

When you have supply shocks, you have to look at core inflation.

Won't offer a firm view on what he wants the Fed to do at the September FOMC.

Won't prejudge the upcoming FOMC meeting.