Q&A at Mississippi Bankers Association 2026 Annual Convention

Michael Dudley: Hi, good morning, everyone. Michael Dudley, MBA vice chairman, and I’ll be moderating today’s general session. We’re happy to have a very special guest with us today. He’s on a tight time crunch, so we will skip some of the normal news flashes that we put out as far as sponsors and so forth. We’re pleased to be joined this morning by Alberto Musalem, the president and CEO of the Federal Reserve Bank of St Louis. In this role, he currently has a seat on the Federal Open Markets Committee and has a direct voice in the direction of U.S. monetary policy. He also oversees the activity of the Eighth Federal Reserve District, which includes North Mississippi. These activities include economic research, fiscal agent responsibilities for the U.S. Treasury, supervision of the District’s financial institutions, and several other technical functions. He’ll be joined on stage by MBA president and CEO Gordon Fellows, who is going to be asking him some questions. Gordon, I’ll turn it over to you.

Gordon Fellows: Thank you, Michael. Thank you, President Musalem, for being with us. We’re honored to have you here. You’ve been at the Fed St Louis for a couple of years now, and I know outreach is very important to you. So thank you for finding some time to be with us. We are a split Fed state, so there are roughly a third of the state is in your District and two-thirds in Atlanta. So some folks here are very familiar with you, but others are very familiar with Fed Atlanta. Maybe to kick us off, if you could, just for the folks from the Atlanta District who may not know you as well, tell us a little bit about your background, and then maybe pivot, if you will, into what your assessment of the economy is right now.

Alberto Musalem: Gordon, great to be here. I’m glad to be here, look forward to the conversation. My own background is, in my career I’ve transitioned between public service and financial markets a few times. I joined the St. Louis Fed two years ago. Before that, I was running a quantitative investment company. Before that, I was at the New York Fed for a number of years. Before that, I worked in an investment company on Wall Street for about 14 years. Before that, I worked at the International Monetary Fund, helping countries emerge from their financial crises in the mid-90s. So that’s kind of my career. I’m a trained economist, and, you know, I’ve always been in the intersection between finance and economics and public service.

Fellows: I think that’s a great background. And thank you. I know from our conversations in the past how important public service is to you. I appreciate you. I know you could be doing a lot of things right now. You’ve put yourself in a really important seat at a really important time. So thank you for your willingness to serve that way. Could you give us an assessment of the U.S. economy as it stands today, and what you think that may mean for interest rates?

Musalem: The way I see the economy today is, it came into 2026 with a fair amount of momentum. There are a lot of tailwinds propelling the economy forward. There are some headwinds. My assessment is that the tailwinds are larger than the headwinds. The tailwinds are fiscal policy support, our own monetary policy easing over the last year and a half is still playing through the economy, financial conditions and financing conditions. I see them as very accommodative. We have a deregulation impulse happening through the economy right now in several parts of the economy, including in financial services. And of course, we have a demand boom occurring related to the AI buildup and everything around it. So the economy has a reasonable forward momentum. There are some headwinds, you know. The uncertainty around tariffs, the uncertainty around the Middle East conflict, the high energy prices, high fertilizer prices, high aluminum prices are all headwinds. But I think the balance is that the tailwinds are stronger than the headwinds.

In terms of our own dual mandate, we care about price stability and maximum employment. The labor market seems like it has stabilized. Last year, it was gradually cooling. In the last six months or so, it seems like it’s been stabilizing. The unemployment rate is around what economists call the natural rate of unemployment. So somewhere between four and four and a half percent is that range for me. The recent payroll growth has been consistent with payroll growth that would be breakeven, meaning the payroll growth that would stabilize the unemployment rate—so about 65,000 persons in the last three months on average—and the claims for unemployment have been stabilizing or coming down. So labor market seems like it’s been stabilizing. On the inflation side, the other side of our mandate, inflation is running meaningfully above our target of 2%. The last reading for March of PCE inflation was 3.2% for core and 3.5% for headline. Some of that is still the effect of tariffs playing through, some of that is the energy price shock from the Middle East conflict. But there’s also underlying inflation that we need to worry about as monetary policymakers. Inflation expectations have come up in the short term; long-term inflation expectations have been drifting up a little bit. So that’s the summary of the economy.

The risk going forward, in my view, the risks have been shifting. We have risks both on the employment side and on the inflation side. In my understanding, that risk has been shifting toward more risk on the inflation side than the employment side. In terms of monetary policy, which I guess is what you want to hear, my own views are that there are very plausible scenarios under which the economy would require us to keep the policy rate at its current level for some time. The current policy setting when you adjust the federal funds rate for inflation—the real federal funds rate—is around one-half of 1% or lower, and that is below what the committee believes is the long-term real neutral rate, which is 1%, so we are either neutral in real terms or slightly accommodative in real terms. That’s my assessment. And I also see plausible scenarios under which the economy might require us to reduce the interest rate further. I see plausible scenarios under which the economy may require higher interest rates. So a lot of uncertainty right now, and it’s important to see how things settle.

Fellows: Uncertainty has been the name of the game for a few years now, and I commend you and the rest of the committee for the work you’ve done, steering through that. Maybe just to drill down just a little bit. You mentioned the target rate for inflation of 2%. Some people say and ask, is three the new two, is two really maintainable? I don’t know if you have thoughts on that you can share or not, but any thoughts on two versus three?

Musalem: I am committed, and my colleagues at the FOMC are committed to 2% inflation. That is our target. We’re committed to bringing inflation back down towards 2% and that is the best thing that we can do for healthy growth. When we bring inflation back to 2% that means we can reduce the nominal federal funds rate some more. That means long-term interest rates—the 10-year rate, the five-year rate, the mortgage rate—can also come down. They can take out the inflation premium that is priced into them right now, and all those things should help growth and employment. So right now, what I hear when I talk to people around our District is ... I hear from consumers that they really are having difficulty with higher prices and continuing inflation in terms of keeping up with their real incomes. I hear the same thing from companies. The CEO of a manufacturing company recently told me, “Because my input costs have risen so much, my nonlabor input costs, I’m unable to hire as much as I would like to have hired.” So companies and households are feeling constrained by the recent rate of inflation, and it’s important that we bring inflation back down to 2%.

Fellows: Excellent thoughts. I’m curious. So for audience awareness, most of the banks in this room are small community banks. We have a few regionals here that I would call small regionals. But for the most part, everybody in the room is under a billion dollars. And so when you think about macroeconomic cycles. I feel like small banks experience things a little differently than Wall Street, a lot differently than Wall Street, and a little differently than the regional banks. So do you have any thoughts about how community banks in particular ought to be thinking about the macro environment today?

Musalem: There are some very interesting forces happening right now. Productivity has been increasing since 2023, I would say, and initially it’s been increasing because companies had high input costs after COVID, and they had to resort to automation. But then AI came along around 2023, and there’s a rapid pace of technological development that is also helping this productivity trend that was already happening before AI came onto the scene. So I would think, as a community bank, you have to be thinking very actively about all these technological trends that are happening. You know, if it’s AI, can you use AI in fraud detection, can you use AI in risk management? Can you use AI in customer service? We’re having some innovations in terms of the payment system, potentially tokenized deposits, potentially stablecoins. And if I were a community bank, I would probably be thinking how to join a network, or maybe how to create a network of tokenized deposits with other community banks or a stablecoin, which is a consortium of community banks. I would be thinking about those things.

Fellows: You teed this next question up very well with that answer. Our theme for the convention this year is, I’m going to read it so I get it right, powering the future and navigating what’s next. And that’s really a nod to technological advancement and a reminder that community banks have always been there to help their communities adjust in times of uncertainty. And AI certainly has a lot of economic upside, but it’s also creating some uncertainty, right? So I’m curious if you have thoughts on, as you’ve traveled the District, where have you seen good use cases for community banks to implement technology and anything, if you noticed anything around the District, that community banks ought to know about, ways they can support their customers and communities as change through technology occurs.

Musalem: When I talk to companies and community banks and regional banks in my District, what I hear on AI specifically is a lot of experimentation. Companies and banks are trying to figure out how to deploy AI to gain efficiencies from AI. At the St Louis Fed, we have a really good research department, and we have a few researchers that are really focused on AI and the impact on businesses. And what they find is when you look at different occupations within a business, the occupations that tend to use more AI tend to be more productive. So there is a microeconomic evidence about the effects of AI on productivity. Now, in terms of when you look at the whole economy, productivity has been increasing, but it’s hard to say that we’re in a new productivity renaissance. We’ve had a recovery in productivity. So what I would encourage community banks to do is to continue to experiment, either in their own operations or in partnership with other community banks and networks that may be forming to see how they can make use of this new technology in a way that best serves their customer.

Fellows: Excellent, excellent answer, I think. I’m going to pivot from macro issues into the Fed structure for a second. I think a lot of people in the country think of the Fed as sort of this monolith out of D.C. It’s not that, right? I’ve been very interested lately in learning more about how the Fed got established as a regional entity. You’re an important part of that in St Louis, and I’m curious ... you know, I’m not sure that we as trade groups have done enough to really educate our members about how people like you gather local insight and take that into the rate-setting structure. So I guess if you could, could you reflect on your experience from the Fed St Louis seat about how community banks and Main Street businesses help you set your thought process around monetary policy.

Musalem: Thank you. The Federal Reserve is comprised of three things: the Board of Governors in Washington, D.C., which oversee the 12 Reserve banks, that’s the other part of the Federal Reserve, and then the Federal Open Market Committee, which is a combination of the Board of Governors in Washington D.C., plus the 12 Reserve banks to set monetary policy.

The reason it was created that way is to make sure that in a country as large and complex as ours, the voices of Main Street from all over the country would be heard at the monetary policy table. So my team and I spend a lot of time and a lot of effort, and it’s, frankly, the most enjoyable part of the job, reaching out to businesses, communities, bankers, all of our District. I do that, the other 11 Reserve bank presidents do that. That is our job.

And what we do is, we bring all those views about the economy together at the FOMC meeting when we’re considering interest rates. So the way the meeting works is the first day we go around the table, and each of us reports on what we’re hearing about our districts from all the businesses and banks that we talk to and communities. And that’s a really good way of level-setting about what’s happening around the entire country. We have a saying in the St Louis Fed that says “anecdotes become data.” So what you hear in conversations typically shows up in data three to six months later. So it’s really good to have had the conversation so that when you see things come out in the data, you understand clearly why the data is behaving that way. The 12 Reserve banks, you know, are a very important part of central bank independence, which I’m sure we’ll get into that. These independent views that come from all around the country prevent groupthink, because what I’m hearing, what I’m seeing in our District is different to what the Dallas Fed President may be hearing in her District, or the San Francisco Fed President may be hearing in their District, so that bringing all those diverse views to the table makes for more robust, more stable monetary policy over time.

Fellows: Yeah, the folks that frame the Fed did an outstanding job more than 100 years ago, thinking about making sure we have local feedback. And I like the term you just used. Could you say it again, “anecdotes beget data”? Is that the term?

Musalem: “become data”.

Fellows: I feel like I should make that a bumper sticker. I like that. Really good. So you brought up Fed independence. There’s been a lot of headlines around Fed independence. You know, the Mississippi Bankers Association, just like probably every other banking trade association in the country, feels pretty strongly that Fed independence matters, and it’s pretty critical. Could you talk about from your perspective why does Fed independence matter, particularly for community banks and small towns around the country?

Musalem: So let me talk about monetary policy independence, because there’s a difference between total central bank independence and monetary policy independence. Monetary policy independence is a really valuable asset that a country can have because it’s been shown across many countries and in time that when you have institutional setups where the central bank can carry out monetary policy without short-term political interference or political considerations, the outcomes for communities are better. And by that, I mean you tend to have lower, more stable inflation; higher, more stable employment in those situations; and you have lower, more stable interest rates. So the well-being of communities, and therefore the people that community banks serve, tends to be higher in those situations.

Now, independence of monetary policy has to come in a democracy with democratic legitimacy and accountability and transparency. So the central bank, in this case, the Fed, has to be held accountable for the outcomes that it is producing, has to communicate transparently about what it’s doing and why it’s doing so—what policy and why it’s doing that policy. And my colleagues and I are committed to that. You know, this event is one of those instances, but we do this all over the country with different groups, different governors, the chair goes to Congress, which created the Fed, to give testimony about what we’re doing and how we’re doing it. And so that’s really important.

Going back to the 12 Reserve banks, they are a cornerstone of this independence because again, we bring all these different views from across the country to the table, and we also have research groups that each one of them acts independently, and we might be looking at the same data, but we may all have a different conclusion. So we bring independent views from our research teams also, and that’s really important for the stability of policy. Again, in an economy as large as ours, as complex as ours, having that broad span of coverage is a really important part of independence.

Fellows: So I’ve got one more independence question. There have been some voices in the independence conversation that have sort of said, yes, the Fed should be independent completely on monetary policy, but maybe shouldn’t have the same expectations about independence around bank regulation, and obviously in a room full of bankers, that distinction kind of matters. So I’m just curious, how do you think about… Is there a dividing line there?

Musalem: So the way, the way I think of it, is supervision has always been and continues to be a delegated authority from the Board of Governors, which sits in Washington, D.C., to the different Reserve banks. And it’s really important that supervisors be embedded in the local communities that they serve, because information matters, relationship banking matters, and we know that that is how we finance… I should say you all finance a lot of the job creation in the country through the financing of small and medium enterprises. So again, it’s always been a delegated authority function. The governors that oversee that sit in Washington, D.C. Washington, D.C., is closer to Congress and closer to politics, and that’s my answer.

Fellows: I think that’s very sensible. I may drill down on a regulatory question, since we’re thinking about delegated authority for a minute. So there has been a lot of talk about tailoring regulation in D.C., and I know that that is more probably a question more for the Board of Governors than for the regional banks, but it feels like there’s progress to me being made around tailoring bank regulation, and that’s a really important topic for small banks. So I’m just curious, where do you think this conversation around tailoring is heading, and anything that we could help you better understand around why that matters?

Musalem: Thank you. So my understanding is that Federal Reserve supervisors have always set expectations during the supervisory process that were tailored to an organization’s risk, scope and complexity. And that has been the case and will continue to be the case. Recently, Vice Chair Bowman, vice chair for supervision, released the supervisory operating principles, and in those principles, what they say is that supervision will be focused on material financial risks to banks and less so on procedural documentation type activities, and we are engaged in a review of our matters requiring attention, and matters requiring needed attention, to that.

Fellows: We’re getting close to the end of time. So I’m going to pivot away from regulation, ask another macroeconomic question, but maybe tailor this a little bit to Mississippi. The war in Iran has created a lot of issues around petroleum products and around fertilizer, right? We are a heavy ag[riculture] state. We’re also a manufacturing state, so we’re feeling that, and we’re trying to, as bankers, figure out how we can help our ag customers and our production customers deal with that. And I’m just curious, as you’ve moved around your District, what have you heard about challenges related to these sectors? Is there anything, any wisdom you can share with us around these sectors that we need to know as we help our customers deal with these challenges?

Musalem: Thank you. I’ll say a couple of things. I hear from households and businesses that the uncertainty around the war may reduce confidence and may reduce economic activity, although we don’t know how long the war will last. There was some very encouraging news overnight; there have been encouraging news at other times. And so this depends on the duration and the extent of the war. We don’t know how long it’s going to take and how long it’s going to take to rebuild all of the capacity that may have been impaired in the Middle East.

What I hear in ag specifically—and then I’ll talk more more broadly—agriculture, particularly row crop farming, we all know was an area, a sector that had been challenged even before the recent rise in fertilizer prices, had been challenged because of falling output prices and increasing input prices, including things like insurance, but also direct input prices into the manufacturing part and the planting part. So it’s a sector that was already challenged for four years. Now I think we’re going to our fourth or fifth year of challenge and the recent increase in fertilizer prices, of course, doesn’t help. So that’s agriculture. You know, we talked to a lot of banks that are big participants in financing agriculture. What we hear is that the banks are on top of it. I don’t have any concerns. They’re watching carefully. They’re financing the sector, just as they did before.

Just pivoting to other sectors beyond agriculture. I hear from all sectors that higher input prices—higher aluminum prices, higher helium prices, higher diesel prices—will all be disruptive, and there’s a confidence effect also. For example, the CEO of a major company that produces inputs into manufacturing, for manufacturing industries, or industrial manufacturing, said to me recently: “You know, the uncertainty is so high, and that’s the reason why I’m not hiring.” And to quote him, he said “the best worker to fire is the one that I haven’t hired because of the uncertainty.” So it is weighing on sentiment and may weigh on activity.

Fellows: So we’ve got about less than five minutes left, so I will, I’ll ask you a very broad question here, and you can take it as many ways as you want to sort of end the thing. I think it’s excellent of you to spend time with people in the field. I know you’ve been to Mississippi several times, you’ve been to some of the poorer communities in Mississippi, and you’ve seen the generational poverty we as bankers try to help deal with in our state. And I think it’s excellent that you spend as much time as you do, trying to gather information from the field. So I guess my broad question here is, what can folks in this room do to help share what they know about their communities with you to better inform you as you go through your regular processes on both the monetary policy side and on the regulation side?

Musalem: Thank you. The main thing is engage with the Fed. Engage with the St. Louis Fed, engage with the Atlanta Fed. And there are many ways to engage. So we have—both Feds, the Atlanta Fed and St Louis Fed—have a Community Depository Institutions Advisory Council. It’s a big name, but we bring 12 executives from community banks together. We meet several times a year. We talk about credit conditions. We talk about the economy. We talk about technological challenges, AI challenges, payment system challenges that community banks are having. That’s run out of our supervision groups in both banks. And I would encourage you to engage that way. And there are several representatives from Mississippi in our advisory council. In addition, consider serving on our boards. We have boards of our branches, and we have boards of the home office in St. Louis, and we have community bankers on those boards, and again, tell us about what they’re seeing and hearing relative to their businesses and their clients. We have a good relationship with the banking commissioners in each state and Rhoshunda Kelly, we have a good relationship with her also. So I would encourage you to engage with the Fed in any way that you can. Those are some formal ways to engage, but there are informal ways. You can always reach Allen North, who is sitting over here. He’s part of our supervision team, and he’ll make sure the messages get to me and the Fed more broadly.

Fellows: We got about 90 seconds left. Any final thoughts you want to share, anything we didn’t have time to cover that you want to highlight?

Musalem: I’ll just say thank you for having me today. It’s great to be here. I was looking through the whole agenda of the event. It’s a great event. It’s good to see that you all are discussing all the important events, issues of the day, including technology and also the natural environment. So thanks for having me here.

Fellows: Thank you for making time for this. I know you’ve got to get to the airport, so we’ll get you off stage. Let’s give President Musalem a round of applause.