Musalem: U.S. Economic Outlook and Monetary Policy

Good morning, and thank you for the invitation to join you today.1 It is a pleasure to be with you for the Southwestern Graduate School of Banking's 161st Assembly for Bank Directors. Before we get started on the fireside chat, since the Federal Open Market Committee (FOMC) concluded its January meeting earlier this week, I think it would be helpful to summarize my views on the recent policy decision. I will then offer some remarks on the economy and also share my perspective on the outlook for monetary policy. As we enter 2026, the economy has continued to grow, and I see inflation moving closer to our goal. But beneath the surface, the labor market is fragile. I will provide some perspective on why I think that fragility poses the greater risk and what that means for the path of policy. FED’S BOWMAN: RATE HOLD WAS A CLOSE CALL Fed Governor Michelle Bowman said holding rates steady was not an easy decision and reflected a need for more data. She said policy remains moderately restrictive, but after 75 basis points of cuts last year, the Fed can afford to wait.…

MUSALEM: INFLATION EXPECTATIONS ARE CONSISTENT WITH 2% TARGET ST LOUIS FED'S MUSALEM Q&A/UARK: A.I. IN EARLY STAGES OF CONTRIBUTING TO MACRO PRODUCTIVITY INCREASES; EASIER TO FILL VACANCIES BUT FACE HIGHER COSTS #Musalem #Federalreserve #economy Fed's Musalem: Tariffs are about half of the current inflation overshoot. MUSALEM: WARSH IS EXCEPTIONALLY QUALIFIED FOR FED CHAIR JOB ...

I dissented at the most recent meeting of the Federal Open Market Committee (FOMC) after concluding that cutting the policy rate by 25 basis points was the appropriate stance of policy. Three cuts to the policy rate last year have moved it closer to a neutral setting but monetary policy is still restricting economic activity, and economic data make it clear to me further easing is needed. First, in contrast to the continued solid growth in economic activity, the labor market remains weak. Despite ticking down in its most recent reading, the unemployment rate has risen since the middle of last year. Payroll gains in 2025 were very weak. Compared to the prior ten-year average of about 1.9 million jobs created per year, payrolls increased just under 600,000 for 2025. And, last year's data will be revised downward soon to likely show that there was virtually no growth in payroll employment in 2025. Zero. Zip. Nada. Let this sink in for a moment—zero job growth versus an average of almost 2 million for the 10 years prior to 2025. This does not remotely look like a healthy labor market. While lower labor supply was surely a factor, it also indicates considerable weakness in labor demand. Employers are reluctant to fire workers, but also very reluctant to hire. I have heard in multiple outreach meetings of planned layoffs in 2026. This indicates to me that there is considerable doubt about future employment growth and suggests that a substantial deterioration in the labor market is a significant risk. Second, though inflation is elevated from tariff effects, appropriate monetary policy is to "look through" these effects as long as inflation expectations are anchored, which they are. Inflation excluding tariff effects is running close to the FOMC's 2 percent target and on a path to sustainably reach that goal. With total inflation excluding tariff effects close to our target at just slightly above 2 percent and a weak labor market, the policy rate should Fed's Waller: Virtually no growth in payroll employment in 2025 Fed's Waller: There is considerable doubt about future job growth Just in | Fed's Waller: Inflation, excluding tariffs, approaches 2% target. Fed's Waller: Policy should be closer to neutral, perhaps around 3% vs current rate range of 3.50% to 3.75%