St. Louis Fed President: Current interest rates are still accommodative; the Fed may need to raise rates further.

St. Louis Fed President Musalem said that further rate hikes may be needed to achieve the Fed's 2% inflation target. He believes that even after the Fed raised rates this month, monetary policy may still be stimulative for the economy. In an interview with media on Monday, Musalem said that persistently strong demand and recurring supply-side factors are together keeping inflation risks elevated. In his view, without further tightening of monetary policy, the likelihood that inflation will be significantly above the Fed's 2% target over the next 18 months is greater than the likelihood that it will fall back to the target. This statement further reinforced the hawkish policy signals the Fed has recently sent. Fed officials voted unanimously last week to raise rates, the central bank's first rate increase in more than three years. After the hike, the target range for the federal funds rate rose to 3.75%-4%. At the same time, the Fed officials' latest rate projections showed that another rate hike may come later this year. Fed Chair Warsh said after the meeting that the rate increase was intended to withdraw some of the accommodation in monetary policy and help bring inflation back to the 2% target more quickly. Although the Fed has begun raising rates, Musalem believes the current level of interest rates may still not be enough to clearly restrict economic activity. He said the current 3.75%-4% target range for the federal funds rate is still on the "accommodative side." This judgment means that, in Musalem's view, current monetary policy may still be stimulating the economy to some extent, rather than sufficiently restraining inflation. If this judgment is shared by more Fed officials, it means this round of rate hikes may not be a one-off policy adjustment, but could mark the beginning of further monetary tightening. Musalem does not have a vote this year on monetary policy decisions by the Federal Open Market Committee (FOMC), but he still participates in policy discussions. He also stressed that rather than waiting for inflationary pressures to worsen further before taking larger policy action, raising rates earlier in a gradual manner may cause less disruption to the economy. In other words, Musalem favors smaller, gradual policy tightening before the risk of persistent inflation becomes clearer, in order to reduce the possibility of having to raise rates sharply in the future. Musalem's latest remarks also reflect that the Fed's current focus is shifting from simply observing the level of inflation to judging whether price pressures are persistent. Earlier, Fed Chair Warsh said at a news conference after the September policy meeting that the Middle East conflict and rising energy prices have increased near-term inflationary pressure, but the Fed needs to watch not only one-off price shocks, but also whether these shocks will spread further to other goods and services and affect the public's inflation expectations.