FED: St Louis's Musalem Sounds Wary Of Upside Inflation Risks

St Louis Fed President Musalem (2025 FOMC voter, hawk) reiterates his scenario-based outlook for monetary policy amid tariff/immigration uncertainty in a speech Wednesday, a viewpoint he also expressed in February. Overall he sees increasing risks of inflation stalling above 2%, with both initial and second-round tariff impacts key to the outlook, specifically mentioning risks of having to hold rates for longer or raise them, and advocates for the Fed maintaining what he calls a "patient approach".

• "If the economy remains strong and inflation remains above our target, then I believe the current, modestly restrictive policy will remain appropriate until there is confidence inflation is converging to 2%. If the labor market remains resilient and the second-round effects from tariffs become evident, or if medium- to longer-term inflation expectations begin to increase actual inflation or its persistence, then modestly restrictive policy will be appropriate for longer or a more restrictive policy may need to be considered. If labor market conditions were to deteriorate, with inflation stable or declining toward target and inflation expectations anchored at a level consistent with 2% inflation, policy could be eased further. At this juncture, a patient approach, involving careful assessment of incoming information, the outlook and risks, will help us as we seek maximum employment, price stability and a durable economic expansion."
• He notes "The risks that inflation will stall above 2% or move higher in the near term appear to have increased" and "it is possible and actually probable that inflation will be higher than we had expected. 3 to 6 months ago" even as growth looks weaker. His overall stance appears to be that while balancing the employment/inflation mandates is required, he sees keeping inflation expectations contained as the priority. "A scenario involving labor market softening and above-target or rising inflation would present a challenging environment for monetary policy. This scenario could occur for a variety of reasons, though higher tariffs and reduced immigration have been widely discussed and thought by many as likely to raise prices and soften aggregate demand and employment, at least in the near term. Higher tariffs potentially involve both direct and indirect effects on economic activity, the labor market and inflation, depending on how tariffs are implemented and any retaliation by trading partners."
• In Q&A he says: "that presents some challenges for monetary policy, because you have both sides of the mandate working in opposite directions...so what I think we ought to do in those situations is adopt a balanced approach, which is setting the interest rate with a few things in mind. And one of those things is understanding how far off you are from your employment side of the target or the growth side of the target, and how far off you are relative to the inflation side of the target, and balance that...that balanced approach works well when inflation expectations are stable and anchored and consistent with 2% inflation. If inflation expectations are threatening to become unanchored or becoming an anchor in the long term, then the balanced approach may not work. And at that point, it is my view that we would have to probably lean into the inflation side of our dual mandate to make sure inflation expectations and inflation remain anchored. Ultimately, we can't generate at full employment or maximum employment if inflation and inflation expectations are not anchored. So that's the ultimate objective."