Federal Reserve Bank of St. Louis President Alberto G. Musalem supported last week’s 25 basis point interest rate cut, highlighting growing risks to the labour market even as inflation remains above the Fed’s 2% target.
Speaking at the Brookings Institution on Monday, Musalem said he expects the labour market to stay near full employment or soften only slightly, but recent data show downside risks that justify adjusting policy.
The U.S. economy grew at a 1.4% annual rate in the first half of 2025, slightly below long-term potential, though third-quarter growth is expected to be stronger. Consumer spending has stayed strong among high-income households, but slowed for low- and moderate-income groups.
Musalem pointed to warning signs in the labour market, including rising unemployment for younger workers and African Americans, a higher, broader U6 unemployment rate, and growing long-term unemployment. While layoffs remain low, layoff announcements are increasing.
On inflation, core PCE is expected to come in at 2.9% in Friday’s report, nearly a full percentage point above the Fed’s target. August CPI data also showed rising prices across goods, services, and shelter, with “supercore” inflation topping 4% for the first time since February. Tariffs contributed roughly 0.2–0.3% to core PCE inflation, though Musalem said the impact was “more muted than expected.”
He described current monetary policy as “between modestly restrictive and neutral,” with limited room for further easing. The real policy rate is already near neutral at 0.8%, below the 1% median long-run neutral rate cited by FOMC participants.
Musalem added: “Should further signs of labour market weakness emerge, I would support additional reductions in the policy rate, provided the risk of above-target inflation persistence has not increased and longer-term inflation expectations remain anchored.”
