Federal Reserve Bank of St. Louis President Alberto Musalem said on Thursday that while there have been some positive trends on inflation in recent months, the outlook points to a tariff-driven increase in price pressures. He noted that there is some upside risk to inflation and that the full impact of tariffs may not be felt until late this year or early next year.
Musalem emphasised that it is critical for the Fed to keep long-term inflation expectations anchored, saying that anchored expectations are what allow the U.S. central bank to be responsive to changes in the labour market. He stated that the economy is in a good place, with the labour market at or near full employment, though he acknowledged that hiring trends have been softer than usual and labour supply appears to be declining, potentially due to slowed immigration or other factors.
The official added that he is not seeing a tremendous amount of restrictiveness from current monetary policy and does not believe the U.S. is in a stagflationary environment, noting that both inflation and unemployment would need to be much higher.
Musalem also said financial conditions are currently supportive of economic activity and described the banking system as well-capitalised and liquid. However, he cautioned that non-bank financial sector risks must be closely monitored.