St. Louis Fed president Alberto Musalem said Monday that he is closely watching longer-term inflation expectations and downside risks to growth as he argues for maintaining a “patient approach” to monetary policy.
“I believe a patient policy approach now will help us as we seek maximum employment, price stability, and a durable economic expansion,” he said during a speech in Washington, D.C.
Musalem’s comments come as President Donald Trump gears up to impose tariffs of as high as 25% on Mexico and Canada Tuesday, plus an additional 10% tariff on China.
Musalem said the Fed could “look through” an increase in prices related to tariffs if the impact on inflation is brief or limited. But he said a different response could be called for if inflation is sustained above the Fed’s 2% target or long-term inflation expectations rise.
“In that scenario, a more restrictive monetary policy than the baseline path might be appropriate,” he said.
He also cautioned about lessons learned from the 1970s, when American consumers didn’t believe the Fed could or would bring down inflation, which made inflation that much harder to tame.
One of his colleagues who hails from the same state, Kansas City Fed president Jeff Schmid, also made the same warning last week about the lessons of the 1970s.
“With inflation just recently at a 40-year high, now is not the time to let down our guard,” Schmid said last week.
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The latest reading of the Federal Reserve’s preferred inflation gauge showed prices rose on a monthly basis but dropped year over year, which should keep interest rates on hold when the central bank meets next in March.
But a new survey released last week by the Conference Board showed consumer confidence notched its biggest monthly decline in nearly four years, and inflation expectations for the year ahead jumped to 6% from 5.2% amid higher egg prices and concerns about tariffs from the new Trump administration.
Musalem said Monday that the risk of recent increases in short-term inflation expectations feeding into longer-term expectations may be elevated. He said he perceives the risks to inflation as “skewed to the upside” and is carefully watching near- and longer-term inflation expectations.
“While market and some survey measures of near-term inflation expectations have risen recently, and I am closely watching this, longer-term inflation expectations remain broadly anchored,” he said Monday.
