St. Louis Fed President Warns of Inflation Risks, Cautions Against Further Rate Cuts

St. Louis Fed President Alberto Musalem has voiced concerns over inflation, urging caution regarding additional policy adjustments.

Fed Rates on Hold

Despite three consecutive cuts, the Fed maintained interest rates at its recent meeting due to heightened inflation concerns. Musalem described current rates as "modestly restrictive," a significant improvement from six months ago.

Inflation Concerns

Musalem emphasized the need for confidence in a downward inflation trajectory towards the Fed's 2% goal before considering further rate reductions. However, he acknowledged the increased risk of inflation stalling or rising due to policies or long-term expectations.

Hotter-than-Expected Inflation

The January Consumer Price Index (CPI) report showed a 0.4% increase in core prices, the largest monthly gain since April 2023. Year-over-year core CPI also rose to 3.3%, marking an uptick from December.

Fed's Preferred Measure

The release of the Core Personal Consumption Expenditures (PCE) Index, the Fed's preferred inflation target, is expected next week. Chicago Fed President Austan Goolsbee anticipates a less "sobering" outcome compared to the CPI reading.

Rate Cuts Still on the Table

Atlanta Fed President Raphael Bostic indicated that interest rate cuts remain a possibility, but the recent CPI data has raised questions about a potential trend shift.

Markets Adjust Expectations

Traders have revised their expectations for Fed actions, anticipating fewer rate cuts in 2025. Bostic expressed confidence that the Fed's easing cycle has not been excessive.

Healthy Consumer, Inflation Risk

Musalem emphasized the health of the US consumer despite weaker retail sales and guidance from Walmart. However, he remains vigilant for signs of weakness and the potential for simultaneous inflation and job market deterioration.