(Bloomberg) -- Federal Reserve Bank of St. Louis President Alberto Musalem said it’s not clear any inflationary impact from tariffs will prove temporary, and he cautioned that secondary effects could prompt officials to hold interest rates steady for longer.
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Musalem said there is a greater risk inflation could stall above the Fed’s 2% goal or move higher because of changes to tariffs and other factors, reiterating it’s vital for inflation expectations to remain stable.
“I would be wary of assuming that the impact of tariff increases on inflation will be entirely temporary, or that a full ‘look-through’ strategy will necessarily be appropriate,” Musalem said Wednesday in remarks prepared for an event in Paducah, Kentucky. “I would be especially vigilant about indirect, second-round effects on inflation.”
Musalem differentiated between the direct effect of levies — a one-time price increase — and the second-round effects that could have a more persistent impact on underlying inflation. Last week, Fed Chair Jerome Powell said any inflation effects from President Donald Trump’s trade policies are likely to be transitory, though he underscored much is still unclear.
The St. Louis Fed chief said he supported the central bank’s decision to keep rates steady last week and that a patient approach to policy will help officials evaluate incoming economic data. He laid out the various ways officials may respond, depending on what happens to the labor market and inflation.
If the economy remains strong and inflation remains above target, Musalem said the Fed’s current policy is appropriate. If the labor market stays healthy and there are “second-round” effects from tariffs, officials may need to keep rates “modestly restrictive” for longer, or consider a more restrictive policy stance, he said. And if the job market were to weaken alongside stable or easing inflation, he said “policy could be eased further.”
Inflation Expectations
With inflation still above the Fed’s 2% goal, it becomes even more important for officials to manage consumers’ expectations for future price growth, he said. Should inflation expectations become unmoored, Musalem indicated the Fed would likely need to prioritize its price stability goal compared to the central bank’s employment objectives.