(Bloomberg) -- Federal Reserve Bank of St. Louis President Alberto Musalem said policy should remain “modestly restrictive” until it’s clear inflation is on track to the central bank’s 2% target, and that he sees increased risks that progress may stall or even reverse.
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Musalem emphasized his baseline scenario is for inflation to continue to move toward 2% amid a solid labor market. He noted, however, that upcoming changes in government policy could have a material impact on the path of the economy.
“This baseline scenario requires that monetary policy remains modestly restrictive until inflation convergence is assured, at which point the policy rate can be gradually reduced toward the neutral level as convergence progresses,” Musalem said in prepared remarks Thursday for the Economic Club of New York. The neutral level refers to a policy stance that neither hinders nor promotes economic growth.
“Around this baseline scenario, the risks of inflation stalling above 2% or moving higher seem skewed to the upside,” he said. He added the risk that inflation could stall is greater than that of a significant weakening in the labor market.
Speaking to reporters after his speech, Musalem said he’d like to see inflation making downward progress “consistently.”
Fed officials held the central bank’s benchmark interest rate steady at their January meeting, and have signaled a willingness to remain on hold until they see inflation cool further. Minutes of that meeting also showed policymakers are considering the potential for changing government policies to hinder inflation progress. President Donald Trump is implementing an economic agenda that aims to make drastic changes to US trade and immigration policy.
Musalem said Thursday that “various changes in trade, immigration, regulatory, fiscal and energy policies, or other changes in the economic environment, could materially affect the path of the economy.”
Still, he said his “baseline scenario assumes the net effect on inflation and employment of all such policy changes will be small in the near to medium term.”
Inflation Data
US inflation picked up in January, according to a measure of consumer prices, offering support for the Fed’s patient approach to rate cuts. Still, some officials have said difficulties in fully removing seasonal effects from the inflation figures at the start of the year make the numbers difficult to interpret.