Inflation Concerns May Stall Rate Cuts, St. Louis Fed Chairman Musalem Warns

FOMC voter in 2025, St. Louis Fed Chairman Musalem indicated that there may be a pause in rate cuts at the December meeting or a later one. Against the backdrop of higher-than-expected inflation and diminishing concerns about the labor market, policymakers may be slowing the pace of rate cuts.

Possible Pause in Rate Cuts

On the earning morning of Wednesday, St. Louis Fed Chairman Musalem said there may be a pause in rate cuts at the December meeting or a later one.

Musalem said that with inflation higher than expected and labor market concerns easing, it may be time for policymakers to slow the pace of rate cuts.

He indicated that continued rate reductions over time may be appropriate, but he supports a patient attitude and said the risk of cutting too quickly is greater than the risk of easing too little.

Musalem pointed out that maintaining policy options seems important, and it may be time to consider slowing the pace of rate cuts or pausing rate cuts to carefully assess the current economic environment, upcoming information, and changing prospects.

The St. Louis Fed Chairman said, "While it is not in my baseline scenario, information received since September suggests a higher risk that progress toward 2% inflation could stall, or possibly reverse."

Since September of this year, the Fed has cumulatively lowered the benchmark interest rate by 75 basis points. Against the backdrop of fluctuating inflation data and continued positive signs in the labor market, some Fed officials have called for cautious rate cuts.

Fed officials will hold their next interest rate meeting on December 17th and 18th, local time. Musalem said he expects inflation to converge towards the Fed's 2% target over the next two years.

He also said that policymakers should act cautiously because it is not clear where the neutral interest rate is, and it is uncertain whether productivity growth can continue.

According to the schedule, there will be several important data releases in the coming two weeks, including this Friday's monthly employment market report and next Wednesday's November Consumer Price Index (CPI).

In addition, Fed Chairman Powell will give a speech in the early morning of December 5, Beijing time, which is expected to be his last public speech before the December meeting. The market expects that he may set the tone for the upcoming interest rate meeting and manage market expectations in advance.

Danger Warning

OECD Chief Economist Alvaro Pereira warned in the latest report that the global economy is expected to grow by 3.3% in the next two years, but risks including trade, war, and debt are increasing, which may threaten the economy that has shown extraordinary resilience in recent years.

This is the first global growth outlook assessment report released by a major international economic institution since the end of the U.S. election.

Pereira said that the robust overall performance conceals significant differences between regions and countries, and there are also significant downside risks and uncertainties. Risks related to trade tensions and increased protectionism, potential escalation of geopolitical conflicts, and challenges to fiscal policies in some countries are increasing.

The report further explained that trade tensions and increased protectionism could disrupt global supply chains and push up consumer prices, negatively affecting economic growth; geopolitical tensions could disrupt trade and energy markets, leading to higher energy prices.

In this context, the OECD believes that policy will play a more critical role and advises developed countries' central banks to continue loose policies. At this critical moment, policy plays a key role in managing risks and releasing a stronger, more resilient, and sustainable growth outlook, which requires the synergistic action of monetary, fiscal, and structural policies.

The OECD expects the U.S. economy to maintain a "steady pace" with a GDP growth rate of 2.4% next year, still leading the G7 group, while Germany's economic growth rate next year may only be 0.7%, the lowest level in the G7 group.