St. Louis Federal Reserve President Alberto Musalem stated on Wednesday that the risks to monetary policy have shifted towards higher inflation. Given the apparent stability in the job market, this may necessitate keeping interest rates unchanged for an extended period.
"Inflation is significantly above our target," Musalem said in a speech to the Mississippi Bankers Association. "We face risks on both the employment and inflation fronts. From my perspective, the risks are increasingly tilting toward inflation."
Musalem indicated that the current situation has reached a point where the Fed's policy rate may need to remain on hold until it is clear that inflation is returning to the central bank's 2% target. However, he also noted that there are "plausible scenarios" where the Fed could cut rates or, under other circumstances, be forced to raise them.
"There is considerable uncertainty at present, and it is crucial to watch how events unfold," Musalem pointed out, adding that inflationary pressures extend beyond the effects of tariffs and high oil prices linked to the US-supported war with Iran.
"We need to be concerned about underlying inflation," Musalem stated. Business executives have informed him that rising prices for aluminum, helium, diesel, and other industrial inputs "are all creating disruptions and also a confidence effect." This could potentially increase the risk of rising prices while simultaneously dampening business hiring.
The ultimate outcome could be that the Federal Reserve maintains interest rates at their current level for a prolonged time. The rate has been held in the range of 3.5% to 3.75% since last December. This would interrupt the previously widely anticipated series of rate cuts and add complexity for incoming Fed Chair Waller in implementing the interest rate reductions desired by President Trump.
Investors do not expect any rate cuts until at least the second half of 2027.
Although Musalem currently does not have a vote on the policy-setting committee, his comments echo those of Fed Chair Jerome Powell, who has indicated a shift in the Fed's "focus" toward the potential need to raise rates to counter inflation risks.
The Personal Consumption Expenditures (PCE) price index, which the Fed uses to gauge its 2% inflation target, rose to 3.5% in March from 2.8% the previous month. The "core" inflation rate, which excludes volatile items like recent energy price swings, increased to 3.2% in March from 3% in February.
Upcoming consumer price data for April, due next week, is expected to show a further acceleration in inflation.
Meanwhile, April employment data scheduled for release this Friday is projected to show the unemployment rate holding steady at 4.3%, according to the median forecast from a survey of economists. This aligns with Musalem's assessment of current labor market stability.
The US Congress has mandated the Federal Reserve to achieve maximum employment while maintaining price stability.
"The labor market appears to have stabilized," Musalem said. "We are committed to bringing inflation back down to around 2%, which is the best thing we can do for healthy growth."
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