St. Louis Fed President Alberto Musalem Talks Fed Rates

SPEAKER_1 (0:02)

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Alberto Musalem (0:07)

Michael McKee is in conversation with St. Louis Fed President Alberto Musalem.

Michael McKee (0:11)

We'd like to thank you for being here and thank all of you for being here. Thank all of our Bloomberg television and radio listeners around the world who are going to hopefully take some wisdom away from the conversation if I ask good enough questions. Now, I do bring you one of your own. You know that Alberto is the president of the St. Louis Fed, but prior to that, he was the CEO and co-chief investment officer of events capital asset management. He's also been managing director, partner and global head of research at Tudor Investment Corporation. So, he's a man who knows what you guys are thinking about and hopefully he will give you all the insight that you need to go home and have a profitable quarter.

I don't want to put too much on you.

Alberto Musalem (0:57)

It's great, it's great to be here, Mike. Thanks for the introduction. I'm looking forward to it.

Michael McKee (1:00)

All right. Well, let's start with the elephant in the room anytime you talk to a Fed person. Obviously, what is your view of the state of inflation now and what the Fed has to do with it?

Alberto Musalem (1:15)

So, in my view, inflation is elevated. It's above target. It's being driven by persistent demand pressures and recurring negative supply shocks.

The important thing, at this point in time, is to bring inflation back towards 2% in a timely manner. And at this point in time, it's important to contain any further broadening of inflation pressures or any second-round effects, which could be coming from the negative supply shocks or the persistent demand pressures.

Michael McKee (1:52)

Well, you say, in a timely fashion, what does timely mean?

Alberto Musalem (1:56)

So typically, when I think about monetary policy, when I'm thinking about what the path of rates ought to be, I have in mind somewhere between a year and a half and two years, something like that. So 18 months or thereabouts.

Michael McKee (2:10)

So does that mean that, well, let's put it in terms of your colleagues who have said, we don't have to be in a rush to raise interest rates. What kind of time frame would you put on it?

Alberto Musalem (2:22)

So my sense is that we, to bring inflation back to target in a timely manner, more monetary policy firming will be required. You know, if a timely manner is something like 18 months, that kind of suggests that rates ought to be going up further in an appropriate period of time in the next six to nine months.

Michael McKee (2:48)

October 28th?

Alberto Musalem (2:51)

You know, I go into every meeting with a very open mind, and I haven't prejudged what that outcome of that meeting is going to be or what I'm going to do at that meeting. But I think the general direction of rates require... inflation requires us to be thinking of further policy firming here.

Michael McKee (3:11)

Well, let's explore the reaction function a little bit here. When you're looking at inflation and you say you want to stop second-round effects, I've been out around the country over the last couple of weeks, and the word I kept hearing over and over and over again is diesel, diesel, diesel. Diesel prices have been affecting truckers and trucking companies. You know, you've got a lot of logistics companies in your district.

Is the diesel pressure, is the overall energy pressure starting to creep into other sectors of the economy?

Alberto Musalem (3:41)

So they're both supply and demand, as I said, so I'm going to talk a bit about both.

On the demand side, I hear, so first of all, I hear from folks in my district, whether people or businesses or governments, the main problem is inflation right now. Very little worry about the labor market. Folks, whether they're employers or employees or community leaders, the labor market's fine, you know, balanced and stable. So all the conversations are around inflation. And there you hear demand side stories and supply side. On the demand side, I hear frequently people that are trying to build a hospital, but can't find the electricians to build a hospital because the electricians are working building data centers. And the wages of those electricians have gone up something like 100% over the last two years.

So you hear things like that. You hear folks that have to use copper, you know, copper prices are going up because of demand pressures, not supply pressures. And then you hear, of course, the supply side of it, which diesel is one part of it, and there's a generalized increase in commodity prices. So I hear for manufacturing firms, for agricultural firms, transportation firms, I hear that they are experiencing double-digit increases in input costs and also things like insurance.