US Stock Market | Fed policy in wait-and-watch mode as markets eye next rate move

St. Louis Federal Reserve President Albert Musalem said that the current level of the U.S. policy rate appropriately balances the risks facing the economy, even as inflation is expected to move back toward the central bank’s 2% target later this year and the labor market stabilizes, Reuters reported.

Musalem noted that while his base case does not foresee a sharp downturn in employment, there is a possibility that an increase in layoffs combined with weak job creation could lead to further labor market deterioration. At the same time, he acknowledged the risk that inflation could remain elevated for longer than policymakers would prefer. In his view, these two risks are roughly balanced at present, supporting a steady approach to monetary policy.

Separately, Reuters reported that Kansas City Federal Reserve President Jeffrey Schmid emphasized that inflation remains a key challenge for the central bank. While he suggested the employment situation is in a relatively good place, he indicated that more work is needed on the inflation front.

However, Schmid did not spell out how this mix of factors influences his outlook for monetary policy. He had previously been skeptical of the Federal Reserve’s push last year to lower short-term borrowing costs, a move that brought the target rate range down to between 3.5% and 3.75%.

Markets are currently expecting additional rate cuts this year, but Federal Reserve officials have provided limited forward guidance, with many signaling they are waiting for clearer evidence that inflation is sustainably moving toward the 2% goal.

Last year’s rate cuts were designed to support a softening labor market while maintaining sufficient policy restraint to keep inflation on a downward trajectory.
In addition, Schmid addressed the Federal Reserve’s balance sheet, saying internal discussions are centered on determining the appropriate level of reserves for the financial system, Reuters said. He pointed out that the Fed’s still-significant holdings of mortgage-backed securities from earlier asset purchase programs continue to suppress home borrowing costs, effectively keeping mortgage rates materially lower than they otherwise would be.