St. Louis Federal Reserve President Alberto Musalem emphasized the necessity of continued vigilance regarding inflation, particularly the potential transmission of short-term inflation expectations to longer-term horizons. He cautioned that such a development could impede inflation control efforts and constrain the Federal Reserve’s ability to address labor market vulnerabilities. Musalem highlighted the distinct possibility of rising inflation despite a softening labor market and advocated for counteracting tariff-induced, persistent “second-round” inflation. He stressed the importance of anchored inflation expectations for the Federal Reserve to effectively balance employment and price stability objectives. Acknowledging heightened uncertainty, Musalem stated that current Federal Reserve policy is appropriately positioned. He noted increased downside risks to growth and employment, along with significant headwinds facing the labor market. He observed limited progress on inflation since mid-2024, with increased risks of a near-term rise, necessitating further action. Musalem reiterated his close monitoring of the potential for near-term inflation expectations to influence longer-term expectations. Reports from bankers indicate softening loan demand and weakening consumer loan portfolios, alongside challenging conditions in the agricultural sector. Businesses anticipate raising prices due to tariffs but also report increasing consumer price sensitivity.
