Aug 6 (Reuters) – Federal Reserve Bank of St. Louis President Alberto Musalem \u200csaid on Thursday it is critical for monetary policy to keep working to bring down inflation pressures amid ongoing risks to the central bank\u2019s price-pressure mandate, and should not be set to \u200bbolster high productivity levels in hopes of lower future inflation.<\/p>\n
\u201cInflation is well \u200babove the (Federal Open Market Committee\u2019s) 2% target, and the balance of risks \u2060is tilted toward inflation remaining above target a year or more from now,\u201d \u200bMusalem said in the text of a speech prepared for delivery in S\u00e3o Paulo, Brazil.<\/p>\n
\u201cIt \u200bis crucial that monetary policy put a meaningful restraint on underlying inflation, rather than tolerating somewhat higher inflation today to pursue productivity growth tomorrow,\u201d he said.<\/p>\n
Musalem dedicated the bulk of his remarks \u200bto examining a potential trade-off whereby the Fed keeps policy easier than it otherwise \u200bwould be to help allow for higher rates of productivity, hoping that over the longer run \u200cthis \u2060will lead to lower price pressures.<\/p>\n
He said such a move would be a mistake.<\/p>\n
\u201cThe trouble is that this reasoning takes the central bank\u2019s credibility for granted,\u201d the official said, adding, \u201cthe bargain only works because households, firms and investors keep expecting inflation to return \u200bto target.\u201d<\/p>\n
However, “a central \u200bbank seen to tolerate \u2060above-target inflation on the promise of a future productivity windfall can put that anchor at risk,\u201d Musalem said.<\/p>\n
He also said that \u200bthe economy has been \u201cresilient\u201d over recent months, while noting \u201cthe labor \u200bmarket has \u2060stabilized with solid payroll growth and an unemployment rate close to its longer-run value.\u201d<\/p>\n
Musalem\u2019s remarks were his first since last week\u2019s Federal Open Market Committee meeting, where officials kept their \u2060interest \u200brate target range steady at between 3.5% and 3.75% \u200bamid ongoing expectations in markets officials will have to lift rates at some point to bring down \u200bhigh levels of inflation.<\/p>\n
Reporting by Michael S. Derby in New York; Editing by Matthew Lewis<\/p>\n
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