FED: St Louis's Musalem: Tariffs Could Impact Inflation Well Into 2026

St Louis Fed Pres Musalem, a 2025 FOMC voter and considered to be a hawk, makes his first comments since the June meeting. He does not give away much on his rate views but overall we continue to think he is one of the 7 members who penciled in no rate cuts this year, preferring to wait and see several months of inflation data before deciding on the impact of tariffs.

• He sounds a little dovish on incoming inflation data, emphasizing that on a 3-month basis there have been "very positive inflation trends in core and headline [PCE] in goods and in services, and those are very welcome developments".
• However overall: "The economy is a good place. The labor market is at or around full employment.  It has some downside risks, but it's looking stable and good. Inflation is running slightly above or somewhat above our target. There are some upside risks to inflation. Looking ahead, monetary policy is modestly restrictive and financial conditions are supportive of growth." And his outlook for inflation is for "inflation to increase going forward, mostly owing to tariffs".
• On whether tariffs will be temporary or more persistent, "it's too soon to tell which way it's going to go". He offers a key metric for this: tariff revenue relative to imports is only slowly rising, to estimating 2.5% before April, to 4% in April, to 6-6.5% in May, and close to 8-9% by June, but eventually reaching the "low teens or low 20s" in accordance with the overall effective tariff rate. "So it's going to take time for the tariffs to settle what people are actually paying and therefore how they're passing through", in part because businesses are waiting months to pass through any higher costs.
• Additionally he is mindful of "second round effects and the dollar has depreciated and that could contribute to inflation going forward and "to make sure that short term inflation expectations ... don't seep into longer term inflation expectations."
• As such he suggests that it could be a while before he has enough "certainty" over the inflation impact from tariffs: "There's a scenario where we could be in Q4 of this year or Q1 or Q2 of next year, and tariffs are still working themselves through the economy... I think as we progress through the year, I'm going to get more comfortable in understanding what the total impact of of tariffs may be. I expect that to begin to show up in data with June, July, August, September data. I don't expect it to be the end of it, but it's possible. I may be able to form a picture by October, November, December. It's possible. I may not form a picture. Again, I'm not looking for a complete certainty, but I'm looking for sufficient confidence in one direction or another."
• On the labor market, he says: "both supply and demand and labor markets seem to have cooled at the same time on the demand side. One thing that's interesting is vacancies have been rising lately. So while there is no while the hiring is low, some some increase in vacancies, meaning more more jobs, which is interesting. So we're in a low hiring, low firing environment. When I go around and I talk to companies and I talk to a lot of companies, I'm not hearing about layoffs."