Feb 25 - St. Louis Federal Reserve President Albert Musalem said on Wednesday that he views the current level of the U.S. policy rate as appropriately weighing the economy's principal risks. While his central forecast calls for inflation to ease toward the Fed's 2% objective later this year and for the labor market to settle, he warned that alternative outcomes on both fronts remain possible.
Speaking about downside risks to jobs, Musalem said there is a scenario in which layoffs increase while job creation remains weak. He described that scenario as not his base case but conceded it could occur, with the potential to further weaken the labor market.
"If there were an increase in layoffs with low job creation, you could have a risk of the labor market to deteriorate further; it’s not my base case, but I think it could happen," Musalem said.
On the inflation front, Musalem noted a different but symmetric concern: that inflation may linger at higher-than-desired levels for longer than policymakers would like. He did not assign probabilities beyond describing these outcomes as possibilities, and he emphasized that, in his assessment, the two risks are presently roughly balanced.
"On the inflation side, there is a possibility that inflation could stay higher than we would all like it to be for longer ... these two risks in my assessment are roughly balanced right now," he said.
His comments underline a posture in which the current policy stance is intended to navigate between the risk of a deteriorating labor market and the risk of persistent inflation. Musalem's baseline expectations - disinflation toward 2% later this year and a stabilizing labor market - frame his view that no immediate change to the policy rate is required to correct a directional imbalance, given the present assessment of risks.
The remarks offer a snapshot of a policymaker weighing trade-offs in real time and highlight the conditional nature of the outlook: shifts in job flows or inflation persistence could alter the balance and therefore the policy calculus.
Note on limits of the coverage: Musalem described potential outcomes and his current judgment; he did not quantify probabilities or outline specific policy moves tied to those scenarios.