By Michael S. Derby
NEW YORK, Oct 8 (Reuters) - St. Louis Federal Reserve President Alberto Musalem said on Thursday the US central bank will need to hike interest rates again to bring inflation back to its 2% target, although he declined to say what policymakers should do at their meeting later this month.
"To bring inflation back to target in a timely manner, more monetary policy firming will be required," Musalem said at an event held by Bloomberg in New York.
"If a timely manner is something like
18 months, that kind of suggests that rates ought to be going up further in an appropriate period of time in the next six to nine months," he said.
Musalem, who is not a voting member of the central bank's rate-setting Federal Open Market Committee this year, demurred when asked if the Fed should raise rates at the October 27-28 meeting.
"I go into every meeting with a very open mind, and I haven't prejudged what the outcome of that meeting is going to be, or what I'm going to do at that meeting," Musalem said, adding that the general direction of "inflation requires us to be thinking of further policy firming here."
Traders broadly expect the Fed will hold its policy rate in the 3.75%-4.00% range at the meeting in October. The Fed hiked rates at its September 15-16 meeting in an effort to bring high levels of inflation back to its target.
Policymakers at that meeting also penciled in another rate hike by the end of this year. Traders had been putting strong odds on an October rate hike until New York Fed President John Williams said last week that there is no urgency to act while the Fed weighs incoming data. Fed Vice Chair Philip Jefferson followed up by saying he saw no imminent need to raise rates.
The Fed is now expected to deliver its next rate hike in December.
'UNSUSTAINABLE FISCAL PATH'
In his remarks, Musalem said inflation is the economy's primary problem amid strong growth and a stable job market. He said the Fed can likely lower inflation without denting hiring, and that getting inflation back to the 2% goal would be broadly helpful.
Musalem also noted that even with the notable rise in bond yields, "financial conditions remain accommodative and supportive of economic growth."
He said the rise in yields does not signal investors are losing confidence in the Fed. Instead, yields are up on expectations that real rates will go up in a strong economy marked by a lot of competition for capital. Strong investment in the tech sector and large government borrowing needs are helping to keep yields up, he said.
"The US federal government has been on an unsustainable fiscal path now for the better part of two decades," Musalem said, adding that "the risk is there" that heavy levels of government borrowing could create problems for the economy.
(Reporting by Michael S. Derby; Editing by Mark Porter and Paul Simao)
