St. Louis Fed President Alberto Musalem signals he may need to see continuing weakness in the labor market to justify additional cuts. Musalem: I supported the decision to cut last week “as a precautionary move” intended to support a full employment labor market. Policy is between neutral and modestly restrictive, “which I view as appropriate.” “I believe there is limited room for easing further without policy becoming overly accommodate, and we should tread cautiously.” He offers three reasons for said caution: 1) Financial conditions are easy 2) looking through a supply shock can be taken too far; and policy “should continue to lean against persistence in above-target” inflation 2) Policy is close to neutral. Musalem: One-year ahead market-based inflation expectations are at 3.3%, implying a real rate that is around 0.8%. A 1% real rate is not a floor below which the policy rate must not go, but the outlook or balance of risks *must shift further from where they are today* (emphasis mine) to go there. Musalem signals he would support additional cuts “should further signs of labor market weakness emerge.” Musalem: “Overemphasizing the labor market objective runs a risk of excessive policy easing, which could cause a further steepening of the yield curve, a rise in the term premium, or an increase in inflation expectations. Any of these effects could do more harm than good to the labor market and contribute to more persistent above-target inflation.” On the other hand, overemphasizing inflation risks if expectations are well anchored “runs the risk of not providing enough support to maintain a full-employment labor market at a time when downside risks have risen.”(Nick Timiraos)