St. Louis Fed President Alberto Musalem said Wednesday the risks to monetary policy have shifted towards higher inflation, possibly requiring interest rates to stay on hold for some time amid a seemingly stable job market.
"Inflation is running meaningfully above our target," Musalem said in comments to the Mississippi Bankers Association. "We have risks both on the employment side and on the inflation side. In my understanding risks have been shifting towards more risks on the inflation side."
The situation is at the point, Musalem said, where the Fed's policy rate of interest may have to stay on hold until it is clear inflation is returning to the central bank's 2% target, but that there also were "plausible scenarios" under which the Fed could cut rates, and also under which the Fed would have to hike them.
"There's a lot of uncertainty right now, and it's important to see how things settle," said Musalem, noting that inflation pressures were moving beyond the impact of tariffs and high oil prices due to the U.S.-backed war with Iran.
Oil prices have been volatile, spiking and falling amid news reports about progress - or lack of it - in ending the dispute. The global benchmark price dropped fast overnight on news of a possible settlement but then rose back above $100 a barrel. U.S. gasoline prices have risen from around $3 to $4.50 a gallon. A New York Fed measure of global supply chain pressure, meanwhile, jumped to the highest since July of 2022 when manufacturing chains were still snarled from the pandemic and the world faced a systemic surge in prices.
"This is also underlying inflation that we need to worry about," Musalem said, with business executives telling him that higher prices for aluminum, helium, diesel fuel and other industrial inputs "will all be disruptive...There's a confidence effect" that may suppress hiring even as it risks higher price increases.
The net result for the Fed may be an extended pause in any change to a policy rate that has been kept on hold since December in the 3.5% to 3.75% range, stalling what had been anticipated continued rate cuts and complicating incoming Fed chair Kevin Warsh's ability to deliver the rate cuts President Donald Trump has said he expects.
Investors don't anticipate rate cuts at least until the second half of 2027.
Musalem is not currently a voter on rate policy, but his comments demonstrate what Fed Chair Jerome Powell said is movement at the "center" of the Fed towards the possibility that rate hikes might be needed to combat inflation risks.
The Personal Consumption Expenditures price index, used by the Fed to set its 2% inflation target, rose to 3.5% in March from 2.8% the month before, while underlying "core" inflation that excludes among other things the recent swings in energy prices, rose to 3.2% from 3% in February.
New consumer price data to be released next week for April is expected to show further acceleration.
Jobs data for April scheduled for release this Friday, meanwhile, is expected to show a steady unemployment rate of 4.3% according to the median forecast of economists polled by Reuters, consistent with what Musalem said is current stability in the job market.
The Fed is charged by Congress with maintaining maximum employment consistent with stable prices.
"The labor market seems like it has stabilized," Musalem said. "We're committed to bringing inflation back down towards 2% and that is the best thing that we can do for healthy growth."
