Fed’s Musalem: A balanced approach to monetary policy only works if inflation expectations are anchored

Federal Reserve (Fed) Bank of St. Louis President Alberto Musalem spoke about the United States (US) economy and monetary policy at a fireside chat before the Springfield Area Chamber of Commerce and Public policy speakers, stating that inflation is running high. He added that the labor market is showing signs of potential weakness and that a balanced approach to monetary policy only works if inflation expectations are anchored.

Key Quotes

Fed's goals are in tension.

A balanced approach to monetary policy only works if inflation expectations are anchored.

Less able to respond to short-term labor market fluctuations if inflation expectations become unanchored.

Right now, inflation expectations are a little elevated up to 2 years out.

Inflation materially above target.

Only 10% of the inflation we are seeing is tariffs.

I expect tariff impact on inflation to fade by 2 halve of 2026.

I expect the labor market to soften some in an orderly way.

There are material risks around baseline expectations.

Inflation could rise more, and the labor market could weaken more.

GDP growth likely to be close to potential for this year.

There are material risks, and I expect the 4th quarter GDP to be healthy.

Monetary policy should continue to lean against inflation.

There is material around baseline expectations.

Limited room for more easing before policy gets overly accommodative.

I am open-minded on a potential further rate cut as further insurance.

Financial conditions are accommodative.”