Fed's Musalem signals wary approach to cutting rates in debut speech

By Lindsay Dunsmuir

(Reuters) - The U.S. central bank should only start to cut interest rates after "months, and more likely quarters" of falling inflation, moderating demand and expanding supply, St. Louis Federal Reserve President Alberto Musalem said on Tuesday, in his first public comments on monetary policy since becoming head of the regional Fed bank.

"I will need to observe a period of favorable inflation, moderating demand and expanding supply before becoming confident that a reduction in the target range for the federal funds rate is appropriate. These conditions could take months, and more likely quarters to play out," Musalem told the CFA Society St. Louis.

The Fed held its benchmark lending rate in the 5.25-5.50% range, unchanged for the past 11 months, at its policy meeting last week as it seeks to keep pressure on the economy to bring inflation back down to its 2% target rate.

Since that meeting, policymakers have so far lined up to consolidate the view they are content to keep rates steady until the economy sends a clearer signal - through either a sustained decline in the rate of price increases or a jump in the unemployment rate.

In a wide-ranging speech in St. Louis, Musalem also did not rule out additional rate hikes should inflation become stuck "meaningfully" above 2% or if it reaccelerates, although he emphasized that was not his base case.

Musalem, who has a PhD in economics with market, public policy and central bank experience, rotates into becoming a voting member on the central bank's rate-setting Federal Open Market Committee next year. He took up his post in April.

The St. Louis Fed chief said he forecasts consumption to moderate in the coming quarters and that based on data released so far this month, he expects a "welcome downshift" in the personal consumption expenditures price index for May.

Retail sales data earlier on Tuesday provided a further indication that consumers are pulling back on spending and prioritizing essentials.

But Musalem indicated he remains uncertain if the current monetary policy stance is as restrictive as it needs to be.

"I ... perceive some uncertainty about the degree of restrictiveness," he said, noting that financial conditions "feel accommodative for some parts of the economy while restrictive for others."

Asked about whether he supported the Fed sticking to its 2% inflation target in the future, Musalem was resolute, however, in dismissing any idea of raising it.

"It's going to muddy the waters and folks will not be able to form expectations about long-term inflation ... It's not a useful or timely idea to do that because we've just experienced the benefits of not doing so."

(Reporting by Lindsay Dunsmuir; Editing by Paul Simao)