St. Louis Federal Reserve Bank President Albert Musalem warned on Friday that there is an increased risk that inflation could be accelerated even if the labor market shows signs of softening.
At an event in Hot Springs, Arkansas, Musalem warned that recent economic and policy developments, including trade and fiscal changes, could lead to dual challenges: rising prices and weakening jobs. The risk, once considered a unlikely outcome, is “close to the end,” he said.
“There is high uncertainty regarding the price of new trade, immigration, fiscal and regulatory policies, employment and timing of economic activity,” Musalem said. “A scenario where inflation will rise and labor markets will be softened simultaneously is a clear possibility that must be considered.”
Musalem said it is important to stabilize long-term inflation expectations and called for close monitoring of incoming data. “I think it would be appropriate to remain cautious in monetary policy, carefully monitor incoming data and provide a comprehensive assessment of the outlook and risks for employment and inflation,” Musalem said.
Musalem’s comments come as it shows that some Fed officials are trying to stabilize interest rates, especially in the face of potential inflationary pressures related to tariffs caused by President Donald Trump’s policies.
Musalem said he expects the current economic expansion to continue, but it is probably slowing down. He cited tightening the financial situation, including a decline in stock prices and an increase in credit spreads.
He also reiterated concern that some of the tariff-related price increases could have lasting effects and that the Fed might need to counter these effects against policy moves. However, he acknowledged the difficulty of detecting such effects in real time.
“It may be appropriate to adhere to the second round of inflation effects,” Musalem said, with most long-term inflation expectations remaining close to the Fed’s 2% target, but a University of Michigan survey showed signs of growing concern.
Data released Friday shows that Americans expect average prices to rise 4.4% over the next five to ten years. Hopes for short-term price growth also rose to 6.7%, the highest since 1981.
“The combination of high economic policy uncertainty, tougher financial position and retaliation by trading partners on US tariffs poses negative risks to economic growth and employment,” Musalem concluded. “Ensuring that inflation expectations are well-fixed provides a balanced approach to monetary policy that is appropriately focused on the maximum employment aspect of the task.”
New York President John Williams said tariff policies and declining immigration are expected to slow down US economic growth significantly, with actual GDP growth likely below 1%. Williams also predicted that unemployment rates will rise from 3.5% to 4% next year, compared to 5%.
*This is not investment advice.
