Fed's Musalem: staying ahead with hikes limits damage to economy

These remarks from the Fed's Musalem were distributed over the newswires:

• Acting more quickly on interest-rate increases reduces the likelihood of damage to the wider economy.
• The US central bank will have to raise rates again “soon.”
• Gradual, step-by-step changes to rates are better than abrupt moves.
• Expected increases in the policy rate are lifting long-term bond yields.
• Inflation is still running too high and is unlikely to abate without Fed action.
• Right now, the central bank’s policy posture is one of accommodation.
• Across the board, financial conditions are still accommodative.
• The best course for the Fed at this moment is to rebuild price stability.
• Financial conditions are tighter, but only slightly.
• The overall economy and the labor market are both solid.
• Risks continue to be tilted toward higher inflation.
• Inflation expectations have remained stable.

The assessment is that Musalem’s remarks are unmistakably hawkish. In his view, inflation will not ease on its own unless the Fed does more, and policy is still providing accommodation. He would rather move early and in modest steps, which reduces the danger that persistent inflation forces a sudden, harsher squeeze that does greater damage to the broad economy.

For market participants, the important distinction is that, in his view, higher long-dated yields have not tightened financial conditions enough. The health of the economy and labor market leaves the Fed room to act, and stable inflation expectations provide comfort without erasing the need for another move. Policy tilts toward another rate rise in the near term, but the open question is how fast that expectation turns into an actual decision.