Fed's Musalem says cooler CPI data is 'encouraging'

By Michael S. Derby

(Reuters) -Federal Reserve Bank of St. Louis President Alberto Musalem welcomed on Thursday a report showing cooling in consumer level inflation pressures but declined to say when he'd like the U.S. central bank to lower its interest rate target.

The June Consumer Price Index "points to encouraging further progress toward lower inflation," Musalem said as part of an appearance before a Little Rock Chamber event in Little Rock, Arkansas. The CPI report comes in a climate where "we are making progress" on returning inflation back to 2%, amid rising evidence consumers are becoming more resistant to higher prices.

Musalem said that when it comes to Fed policy, "monetary policy is restrictive, but not overly restrictive." He said the Fed made the right call in holding rates steady at its policy meeting last month.

He said the current level of the federal funds rate is "the appropriate posture for policy at the current juncture" because it allows central bankers to balance the risks of cutting rates too early versus cutting them too late and damaging an otherwise strong job market.

While Musalem did not comment on when the Fed might cut rates, he noted "I also supported the statement that says it will not be appropriate to lower interest rates until the Committee gains greater confidence that inflation" will converge to 2%.

As part of his thinking about rate cuts, Musalem said he'd like to see moderation in demand and data that gives him "confidence that inflation on a 12-month horizon can be expected to converge by the middle or late part of next year to 2%." He added, "we're on a good path."

Released earlier on Thursday, the June consumer price index showed inflation cooled considerably, falling by an unexpectedly wide margin to 3% in June versus the same month a year ago, from a 3.3% annualized rise in May. The data fueled hope that inflation pressures are once again ebbing after proving unexpectedly strong over the start of the year.

The CPI data helped bolster the case the Fed is on track to cut the cost of short-term borrowing before the year is over. Market participants are eyeing the fall as the starting point for cuts in what is now a federal funds target rate range of between 5.25% and 5.5%.

J.P. Morgan economist Michael Feroli said in light of how the CPI came in, “we now think this paves the way for a first cut in September (previously November), followed by quarterly cuts thereafter,” while analysts at research firm LHMeyer told clients the overall CPI report “confirmed that disinflation is lasting and sustainable.”

Fed officials have said repeatedly that a precondition of them cutting rates is gaining confidence that inflation is moving sustainably back to the 2% target.

Speaking on Wednesday before the Senate, Fed Chair Jerome Powell reiterated that point and declined to give firm guidance about the future of interest rate policy, saying when it came to the outlook, “I'm not sending any signals on any particular date of any meeting whatsoever.”

In recent comments, Musalem, a former top New York Fed staffer and financial market participant, staked out a hawkish policy outlook, saying on June 18 that finding the conditions that would allow for a rate cut “could take months, and more likely quarters to play out.”

(Reporting by Michael S. Derby; Editing by Andrea Ricci)