St. Louis Fed President Alberto Musalem said on Thursday that U.S. inflation still requires further monetary policy tightening in order to return to the Federal Reserve's 2% target in a timely manner.

Speaking at an event hosted by Bloomberg in New York, Musalem said: "In order to get inflation back to target in a timely manner, further tightening of monetary policy is needed." He further explained that if "timely" means achieving the inflation target within roughly 18 months, then further rate increases would be needed at an appropriate time over the next six to nine months.

However, Musalem declined to explicitly state whether rates should be raised at the October 27-28 policy meeting. He is not a voting member of the Federal Open Market Committee (FOMC) this year.

Musalem said: "I approach every meeting with a very open mind. I have not pre-judged the outcome of that meeting, nor have I pre-judged what I would do at that meeting." He also emphasized: "The broad direction of inflation requires us to consider further tightening policy here."

October rate hike expectations cool, market shifts to betting on December

Traders widely expect the Fed to hold the policy rate in the 3.75% to 4.00% range at its October meeting. The Fed raised rates at its September 15-16 meeting, aiming to pull elevated inflation back toward target. At the time, policymakers also projected one more rate hike before year-end.

Previously, the market broadly believed that an October rate hike was highly likely. But New York Fed President John Williams said last week that the Fed does not need to rush to act as it assesses the latest economic data. Fed Vice Chair Philip Jefferson subsequently said he sees no imminent need for a rate hike. The two officials' remarks prompted the market to adjust expectations. Currently, traders expect the Fed's next rate hike to come in December.

Musalem did not endorse an October move, but his support for further tightening in the coming months remains clear.

Solid economic growth, inflation remains the main problem

Musalem believes that U.S. economic growth is strong, the job market remains stable, and the main issue facing the economy is still inflation. He said the Fed will likely be able to bring inflation down without harming hiring. Returning inflation to the 2% target would broadly benefit the U.S. economy.

Regarding the recent significant rise in bond yields, Musalem said this does not mean investors are losing confidence in the Fed. He said that in an environment of sustained economic strength and intense competition for capital, the market expects real interest rates to rise further. Large-scale investment in the technology sector and the federal government's massive borrowing needs are also supporting higher bond yields. Musalem also noted that despite the notable rise in yields, overall financial conditions remain accommodative and continue to support economic growth.

Musalem warns U.S. fiscal path is unsustainable

Beyond inflation and interest rates, Musalem also expressed concern about the long-term fiscal situation of the United States. He said: "The U.S. federal government has been on an unsustainable fiscal path for about two decades." He added that high levels of government borrowing carry the risk of creating problems for the economy. Continued government borrowing requires absorbing funds from the market, which could drive up financing costs. Musalem listed massive government borrowing needs as one of the factors keeping yields elevated.

With the Fed still needing to consider further rate hikes, inflation, strong economic activity and government financing needs are together influencing the path of interest rates. Musalem did not give a clear answer on the October meeting, but he believes that if the 2% inflation target is to be achieved in about 18 months, further monetary policy tightening may still be needed over the next six to nine months.