St. Louis Federal Reserve Bank President Alberto Musalem warned on Friday that there was a growing risk that inflation could accelerate even as the labor market showed signs of softening.
Speaking at an event in Hot Springs, Arkansas, Musalem warned that recent economic and policy developments, including trade and fiscal changes, could lead to a dual challenge of rising prices and weakening employment. That risk, once seen as a less likely outcome, is now “closer to the bottom line,” he said.
“Uncertainty about the net impact and timing of new trade, immigration, fiscal and regulatory policies on prices, employment and economic activity is high,” Musalem said. “A scenario in which inflation rises and the labour market softens at the same time is a distinct possibility that must be considered.”
Musalem said it was important to keep long-term inflation expectations stable and called for incoming data to continue to be closely monitored. “I believe it remains appropriate for monetary policy to remain cautious, carefully monitor incoming data and comprehensively assess the outlook and risks to employment and inflation,” Musalem said.
Musalem’s comments come as some Fed officials have signaled they are willing to keep interest rates steady in the face of potential inflationary pressures, particularly those linked to tariffs resulting from President Donald Trump’s policies.
Musalem said he expects the current economic expansion to continue, though likely at a slower pace. He cited falling stock prices and tightening financial conditions, including widening credit spreads, as factors that could drag on growth if they continue.
He also reiterated concerns that some tariff-related price increases could have lasting effects and that the Fed may need to counter those effects with policy moves. However, he acknowledged the difficulty of detecting such effects in real time.
“It may be appropriate to guard against a second round of inflationary effects,” Musalem said, noting that most long-term inflation expectations remain close to the Fed’s 2% target, but a University of Michigan survey showed signs of increasing concerns.
Americans expect average prices to rise 4.4% over the next five to 10 years, the most since 1991, according to data released Friday. Short-term price growth expectations also rose to 6.7%, the highest since 1981.
“The combination of high economic policy uncertainty, tighter financial conditions and retaliation by trading partners to US tariffs poses downside risks to economic growth and employment,” Musalem concluded. “Ensuring that inflation expectations are well anchored provides a balanced approach to monetary policy with an appropriate focus on the maximum employment side of the task.”
New York Fed President John Williams said that U.S. economic growth is expected to slow significantly due to tariff policies and reduced immigration, and that real GDP growth is likely to fall below 1%. Williams also predicted that unemployment will rise to between 4.5% and 5% next year, while inflation will rise to between 3.5% and 4%.
*This is not investment advice.
