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Fed official says inflation near 2.5% to 3% is still too high
Alberto Musalem argued that hiking now could help the Fed avoid more aggressive action later, while warning current policy may not reliably bring inflation back to 2%.
Federal Reserve Bank of St. Louis President Alberto Musalem said underlying inflation remains too high, putting the rate outlook squarely on bringing prices back toward the Fed’s 2% goal. Speaking in an interview with CNBC, Musalem described underlying inflation as running between 2.5% and 3% and emphasized that it must be lowered.
Musalem delivered a moderately hawkish message, linking the risk of higher inflation to the need for pre-emptive tightening. He said that hiking now could reduce the need for more aggressive action later, even as he framed current financial conditions as neutral to accommodative and stressed Fed credibility and independence from fiscal policy.
He pointed to strong growth and a recovery in productivity as influences on the economy, while also citing potential supply shocks, including a possible “super El Nino.” FXStreet also noted that the FXS Fed Sentiment Index fell 0.34 points to 132.42, indicating only a modest pullback in perceived hawkishness even with the Fed still in hawkish territory.
Musalem added that, given current Fed rates, he sees a lower probability of returning inflation to 2%, and he said some parts of the economy are experiencing credit being crowded out. He also contrasted the usefulness of forward guidance at very low rates with the different role of communicating a framework.