St. Louis Fed President Alberto Musalem has laid out his baseline scenario for 2026: the U.S. economy could grow at or above-potential, the labor market should stabilise around current levels, and the central bank has likely reached the neutral level.
Musalem’s comments suggests that he’s satisfied with the current restrictive-to-neutral policy and doesn’t see the need for faster easing without more labour market deterioration or bigger than expected moderation in inflation.
He sees “robust” economy fueled by two major tailwinds: fiscal stimulus and lagged impact of rate cuts. While Musalem finds recent data “encouraging,” he warns that inflation is still closer to 3% than the Fed’s 2% target. He expects goods and housing inflation to ease this year but warned that if service-inflation proved to be sticky, the Fed may have to hold rates higher for longer.
He described the labor market as “cooling in an orderly way.” He added that the US may need to add 30,000 to 80,000 jobs per month to keep the unemployment rate stable. He sees the current unemployment rate around its neutral level which shouldn’t put upward pressure on inflation. He justified his support for the December rate cut as a preemptive strike to prevent the labor market from cooling too much.
The most significant takeaway for markets is Musalem’s view that policy is “right around neutral” and that there is “little reason for further easing” in the near term
