US inflation pressures may require further Fed rate hikes: St. Louis Fed President Alberto Musalem

Musalem, who is not currently a voting member of the Federal Reserves rate-setting Federal Open Market Committee (FOMC), stressed the need to keep monetary policy sufficiently restrictive to bring inflation back to target.

I think it's crucial that policy puts a meaningful restraint on inflation, he said, adding that this would help the Fed return inflation to its target in about a year and a half, while allowing time for tighter monetary policy to work through the economy.

"Both persistent demand and recurring supply forces are continuing to contribute to keeping inflation risks elevated, and I judge that without further policy restraint on inflation it is more likely to be substantially above our 2% target in 18 months than at target," Musalem said during an interview with Reuters.

As per Musalem, acting earlier with gradual policy tightening would be less disruptive than delaying action and potentially requiring larger and more abrupt measures later.

He stressed that inflation was already a reality rather than merely a risk, noting that even after excluding the impact of oil and other supply-related factors, underlying inflation was running about one percentage point above the Feds target and was moving in the wrong direction.

Progress towards bringing inflation back to the Feds 2 per cent target has also remained limited. The Personal Consumption Expenditures (PCE) Price Index, the central banks preferred inflation gauge, rose 3.7 per cent year-on-year in July, compared with a recent low of 2.3 per cent in April 2025, as the Trump administration implemented its global import tariff plans.

The increase in import prices was followed this year by the US-Israeli war with Iran, which pushed global fuel costs higher, with diesel prices recently reaching a record high. Musalem also pointed to rising prices of commodities such as copper, partly driven by the artificial intelligence investment boom.

"I think there's a recognition that consumption and investment are growing at a very healthy, very strong clip, and at the same time the risks on the inflation side seem to have increased for a variety of reasons, including geopolitical forces," Musalem said, noted Reuters.

Investors currently expect the Fed to deliver three additional 25-basis-point rate hikes over its five policy meetings through April, while pricing in roughly even odds of another increase in October, just ahead of the US midterm elections.

"The labor market is not a source of inflation. There's not necessarily a need to slow the labor market down or to cool it to attain our inflation target," Musalem said, highlighting, the job market is "stable and balanced and around full employment." (ANI)