Fed Concerns Rise Over Inflation Risks Amid Talk of Tariffs, Immigration Policies
St. Louis Fed President Alberto Musalem expressed caution regarding inflation at the Economic Club of New York, echoing concerns among central bankers.
Despite three consecutive rate cuts, Musalem believes it's prudent to "monitor economic conditions" before further adjustments. He views current rates as "modestly restrictive" but less so than six months ago.
Lowering rates requires confidence that inflation is heading towards the Fed's 2% goal. However, the risk of stalled inflation progress outweighs that of labor market weakness.
A hotter-than-expected January CPI reading suggests the Fed will likely maintain rates for the foreseeable future. "Core" CPI rose 0.4% month-over-month in January, the highest since April 2023.
Chicago Fed President Austan Goolsbee predicts the core Personal Consumption Expenditures (PCE) Index will remain elevated. Atlanta Fed President Raphael Bostic states that rate cuts remain possible in 2025 but emphasizes the need to assess whether recent data reflects a trend or a temporary bump.
Traders have adjusted their expectations to only one rate cut in 2025. Despite weaker retail sales, Musalem believes the consumer is still healthy. He monitors for signs of weakness, including the potential for simultaneous inflation and employment softening.