Fed's Musalem Sees Labor Market Cooling, Urges Caution on Rates

Economic Outlook - The economy has been resilient, with growth around 18% annually, despite uncertainty [2] - The labor market has been near full employment but is cooling, with both demand and supply decreasing [2] - Inflation is closer to 3% than the 2% target [2] - Companies report resilient consumption, with growth being fine, and the labor market softening slightly [5] Consumer Finance - Higher-income households are consuming due to wealth effects from the stock market and home prices [7] - Lower-income households are taking on more credit card debt to maintain consumption [7] - Consumer balance sheets are generally okay, but there was an increase in subprime loan and credit card defaults over the past year, which have since stabilized [8][9] Business Concerns - Companies indicate uncertainty has plateaued, allowing them to operate with a higher level of uncertainty [11] - Some companies are passing on higher costs related to terrorism, insurance, and upstream production [11][12] - Companies closer to the consumer are facing difficulty passing on costs due to pushback from final buyers [12][13] Labor Market - The labor market is cooling in an orderly way, with both supply and demand decreasing [13] - Layoff announcements have been noted, but weekly claims remain stable [13][14] Monetary Policy - Monetary policy should consider both cyclical/demand-side factors and structural transitions in the economy [15][16] - The real federal funds rate has declined by 250 basis points in the past year, with 150 basis points from nominal interest rate reductions and 100 basis points from rising expected inflation due to tariffs [18][19] - Companies are more concerned about non-interest costs, such as raw material and insurance costs, than interest costs [20][21] - There is limited room to ease policy further without it becoming overly accommodative, with the real federal funds rate around 1%, which is the long-run neutral rate [25] Inflation and Household Impact - It's important to bring inflation back towards 2% to allow households to catch up with their real incomes [21][26][27] - People are increasingly experiencing "more month than money," going to food pantries, and requesting utility assistance [26][27] Asset Prices - Financial conditions are very accommodative, and asset valuations are notable, with house and stock prices appearing elevated [28][29]