FED: St Louis's Musalem: Upside Inflation Risks, Potential Policy Dilemma

St Louis Fed President Musalem delivers his first monetary policy-related comments since the January meeting (link here - he is a 2025 voter and a hawk). He sees policy as "modestly restrictive", and sees rates coming down further in his baseline scenario but only once "inflation convergence is assured". He sees greater risks on the inflation side of the Fed's mandate than on the employment side, and notes a recent rise in near-term inflation expectations. Key quotes from his prepared remarks are below - there is a Q&A to follow.

• "I expect inflation will continue to converge to the FOMC’s 2% target and the labor market will remain near full employment. This baseline scenario requires that monetary policy remains modestly restrictive until inflation convergence is assured, at which point the policy rate can be gradually reduced toward the neutral level as convergence progresses."
• Note that Musalem's assessment of upside inflation risks being greater than those of downside unemployment risks ("I perceive the risk that progress on inflation could stall as being greater than the risk of substantial labor market weakening") appears to make him a hawkish outlier on the FOMC, at least as recently as the January meeting for which minutes were out yesterday ("the vast majority of participants judged that the risks to the achievement of the Committee's dual-mandate objectives of maximum employment and price stability were roughly in balance, though a couple commented that the risks to achieving the price stability mandate currently appeared to be greater than the risks to achieving the maximum employment mandate.")
• On that potential dilemma for the Fed - while "My baseline scenario assumes the net effect on inflation and employment of all such policy changes [trade, immigration, regulatory, fiscal, energy] will be small in the near to medium term", "an alternative and plausible scenario in which inflation ceases to converge, or rises, at the same time the labor market weakens must also be considered. This scenario could arise for a variety of reasons. These days, higher tariffs and immigration policies are often discussed and thought likely to increase prices, cool aggregate demand and possibly soften employment. From the standpoint of monetary policy, it could be appropriate to ignore, or “look through,” an increase in the price level if the impact on inflation is expected to be brief and limited. However, a different monetary policy response could be appropriate if higher inflation is sustained, or longer-term inflation expectations rise. In that scenario, a more restrictive path of monetary policy relative to the baseline path might be appropriate."