MNI: Musalem Says Fed Policy Stance Remains Appropriate

The Federal Reserve is well positioned to navigate material changes in the economic outlook as they become apparent, and should wait and see how the U.S. outlook and risks evolve, St. Louis Fed President Alberto Musalem said Tuesday. 

The underlying strength of the U.S. economy, the resilient labor market, above target inflation, and some inflation expectations moving higher indicate that the FOMC’s modestly restrictive monetary policy remains appropriate, he said in prepared remarks. Higher tariffs are likely to both dampen activity and exert inflationary pressure, at least in the near term. "There remains considerable uncertainty about where tariff rates will ultimately settle and what their effects will be."

The St. Louis Fed chief said there are two equally likely scenarios in how monetary policy should respond if trade negotiations do not soon and durably reduce tariffs and retaliation. (See: MNI INTERVIEW: Fed Cuts Start In Q4 As Tariffs Weigh -Crandall)

Tariffs could have only a modest and temporary impact on inflation concentrated in the remainder of 2025 and under this scenario a monetary policy of looking through the temporarily higher inflation and possibly easing policy to counter negative effects on employment could be appropriate.

In the second scenario, it seems at least equally likely that the inflationary impetus from higher tariffs could be more persistent. A balanced monetary policy that is responsive to deviations of inflation from target and to employment shortfalls will be appropriate in this scenario, provided that longer-term inflation expectations are well anchored, he said. 

If, however, ongoing negotiations durably de-escalate tensions and lead to a resumption of global trade flows with only a modest reconfiguration of supply chains, then the U.S. economy could remain close to the path that it was on. In that case, the current stance of monetary policy, which is focused on bringing inflation back to 2% in the context of a full employment labor market, will remain appropriate, he said. 

"I will continue to actively monitor incoming information to assess the impact of tariffs and other factors on the economic outlook," Musalem said. "Through rigorous forward-looking analysis of incoming information, and with careful attention on inflation expectations, I believe that monetary policy is well positioned to navigate material changes in the economic outlook as they become apparent, and to deliver stable prices and maximum employment for the American people over time."