St. Louis Fed President Warns of Inflationary Risks, Favors Cautious Approach

Alberto Musalem, President of the Federal Reserve Bank of St. Louis, has expressed concerns over inflation amidst discussions of increased tariffs and immigration policy changes. Addressing the Economic Club of New York, Musalem emphasized the need for vigilance in monitoring economic conditions before further adjustments to monetary policy.

Rate Pause Maintained

Despite cutting rates three times consecutively, the Fed maintained rates at its recent meeting. Musalem characterized the current rate environment as "modestly restrictive," noting a meaningful decrease in restrictiveness compared to six months ago.

Inflationary Outlook

Musalem indicated that he would prefer further assurance of inflation's downward trajectory before considering rate cuts. However, he acknowledged that the risk of inflation stalling is currently greater than the risk of a significant labor market downturn.

Recent Inflation Data

January's Consumer Price Index (CPI) showed a higher-than-expected monthly increase in core inflation. This reading suggests that the Fed is likely to maintain rate holds for the foreseeable future.

PCE Inflation

Austan Goolsbee, President of the Chicago Fed, believes that the Core Personal Consumption Expenditures (PCE) Index, a preferred inflation target for the Fed, will provide a less concerning outlook than the CPI.

Market Expectations

Markets have adjusted their expectations for the Fed's actions this year. Traders now predict a single rate cut later in 2025, which is a decrease from the previously anticipated two cuts.

Consumer Health and Economic Outlook

Musalem expressed his belief that US consumers remain healthy despite recent weaker retail sales and disappointing guidance from Walmart. He remains vigilant for signs of weakness but does not anticipate any at this time.

Inflation and Employment

Musalem noted the potential for inflation to rise while employment weakens simultaneously. He highlighted the potential impact of tariff and immigration policy discussions on prices, aggregate demand, and employment.