St. Louis Fed President Alberto Musalem said the central bank will likely need to raise interest rates further to curb inflation fueled by strong demand and rising commodity prices beyond oil. He argued the Fed should act sooner with smaller increases rather than wait and risk a larger move later, while adding that the labor market is not driving the price pressure.
The Federal Reserve will likely need to raise interest rates further to lower inflation tied to strong demand and a commodity shock that has spread beyond oil, St. Louis Fed President Alberto Musalem said Monday in an interview with Reuters. He said the Fed should act sooner rather than wait for larger, more disruptive action later.
Demand and supply forces both push prices higher
Musalem said inflation is likely to stay substantially above the Fed's 2% target 18 months from now without further policy restraint. Even after stripping out oil and other supply-related factors, he said underlying inflation is running about a percentage point above target and moving in the wrong direction.
Copper and other commodity prices have also climbed as a side effect of the artificial intelligence investment boom, Musalem said. The start of the US-Israeli war with Iran separately pushed diesel prices to a record high. Firms in his Fed district report sharply higher costs for fuel, raw materials, transportation, insurance and skilled labor, and are planning to raise selling prices.
Labor market not seen as the problem
According to Reuters, Musalem said "The labor market is not a source of inflation," pointing to a job market that remains stable and around full employment. He does not believe tighter policy would need to cost jobs or raise the odds of a recession.
That reading matters because the Fed already raised rates a quarter point last week and dropped language that had attributed inflation partly to supply shocks, now simply describing it as elevated. The Fed's preferred gauge, the Personal Consumption Expenditures Price Index, stood at 3.7% year-over-year in July, up from a recent low of 2.3% in April 2025. Musalem called the current 3.75%-4.00% policy rate on the accommodative side.
Investors currently expect three more quarter-point rate hikes over the five policy meetings through April. The market is separately pricing a 55% chance of a hike in October. The Fed's own median projection points to just one more hike this year, with officials nearly split on whether another follows in 2027. Musalem is not currently a voting member of the FOMC.
Sources: Investing.com, InvestingLive
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