Fed's Musalem calls for more rate hikes

St. Louis Federal Reserve (Fed) President Alberto Musalem said interest rates likely need to rise further to tame inflation that is both demand- and supply-driven. He warned that without more policy restraint, inflation is more likely to remain substantially above the Fed's 2% target 18 months from now, and said it is better for hikes to be "earlier and incremental" rather than "later and larger."

Musalem said inflation is still "too high" at up to 3% even after stripping out supply-related factors, and that business contacts are planning price increases "closer to 3%." He described the commodity shock as extending beyond Oil to base metals such as Copper, while calling the labor market stable around full employment and not a source of inflation pressure.

Musalem highlights:

Without further policy restraint it is more likely inflation will remain substantially above 2% target 18 months from now.
St. Louis fed's musalem: interest rates likely need to rise further to tame inflation that is both demand- and supply-driven.
Labor market stable around full employment and not a source of inflation pressure.
Commodity shock is more than just oil, includes BASE metals like copper.
Better for rate hikes to be 'earlier and incremental' rather than 'later and larger'.
Even when stripping out supply-related factors, inflation is still 'too high' at up to 3%.
Business contacts say they are planning on price increases 'closer to 3%'.

Market Reaction

The US Dollar Index is catching a bid on Musalem's firmly hawkish commentary; market impact is likely to be muted, as Musalem is not in the voting rotation for the Federal Open Market Committee (FOMC) this year. However, Fed officials outright stating a need for further hiking action from the Fed could serve as a canary in the coal mine for further Fed action.

US Dollar Index, 5-minute chart