St. Louis Federal Reserve Chairman: Current interest rates are still too loose, and the Federal Reserve may need to raise interest rates further

The Zhitong Finance App learned that St. Louis Federal Reserve Chairman Mussalem said that further interest rate hikes may be needed to achieve the Fed's 2% inflation target. He believes that even if the Federal Reserve raised interest rates this month, the current monetary policy may still have a stimulating effect on the economy.

In an interview with the media on Monday, Mussalem said that continued strong demand and repeated supply-side factors are jointly driving the risk of inflation to remain high. In his view, if monetary policy is not further tightened, the possibility that the inflation rate for the next 18 months will be significantly higher than the Fed's 2% target, and higher than the possibility that inflation will fall back to the target level.

This statement has further strengthened the hawkish policy signals recently released by the Federal Reserve. Federal Reserve officials voted unanimously to raise interest rates last week. This is the first time in more than three years that the central bank raised interest rates. After this rate hike, the federal funds rate target range rose to 3.75%-4%. Meanwhile, the latest interest rate forecasts from Federal Reserve officials indicate that interest rates may be raised again during the year.

Federal Reserve Chairman Walsh said after the meeting that the interest rate hike aims to withdraw part of the degree of easing in monetary policy and help push inflation back to the 2% target faster.

Although the Federal Reserve has initiated interest rate hikes, Mussalem believes that the current interest rate level may not be sufficient to clearly limit economic activity. He said that the current federal funds rate target range of 3.75%-4% is still on the “loose side.” This judgment means that in Mussalem's view, the current monetary policy may still stimulate the economy to a certain extent, rather than sufficiently suppress economic growth and inflation.

If this judgment is accepted by more Federal Reserve officials, it means that this round of interest rate hikes may not be a one-time policy adjustment, but may be the beginning of a further tightening of monetary policy.

Mussalem did not have the right to vote on Federal Open Market Committee (FOMC) monetary policy decisions this year, but he is still involved in policy discussions.

At the same time, he stressed that instead of waiting for inflationary pressure to further worsen and then take more drastic policy actions, increasing interest rates early on may cause less disturbance to the economy. In other words, Mussalem is inclined to adopt a smaller, gradual policy tightening until the risk of continuing inflation is further clarified to reduce the possibility that interest rates will have to be raised drastically in the future.

Mussalem's latest statement also reflects that the Federal Reserve's current focus is shifting from simply observing the level of inflation to judging whether price pressure is continuous.

Earlier, Federal Reserve Chairman Walsh said at a press conference after the September policy meeting that the Middle East conflict and rising energy prices have increased recent inflationary pressure, but what the Fed needs to pay attention to is not only one-time price shocks, but also whether these shocks will further spread to other goods and services and affect public inflation expectations.