Alberto Musalem, the President of the St. Louis Federal Reserve, expressed concerns about the potential impact of rising short-term inflation expectations on long-term rates. During a speech at the Arkansas Bankers Association, he emphasized that such a shift could complicate efforts to combat inflation and limit the central bank’s ability to respond to labor market weaknesses.
Musalem acknowledged the high degree of uncertainty surrounding tariffs and new policies, warning of a “distinct possibility” that inflation could see a resurgence even as the labor market starts to weaken. He believes that the Federal Reserve is well-prepared but must remain vigilant.
“I would be wary of assuming the impact of high tariffs on inflation would be only brief or limited,” he stated, suggesting a proactive monetary policy to counter second-round effects of tariffs. However, he noted that distinguishing between the fundamental inflation rates and various tariff impacts would be quite challenging in real-time.
Since mid-2024, there has been little progression in controlling inflation, and the introduction of tariffs could likely exacerbate short-term price increases, according to Musalem. Although the conventional wisdom suggests that tariffs should be treated as isolated incidents, he cautioned that this approach poses risks when inflation is already high.
Most market data indicates that long-term inflation expectations remain stable, though the University of Michigan’s survey showed a rise in expectations, with consumers anticipating a 4.4% inflation rate over the next five years—the highest since 1991. Musalem pointed out that maintaining anchored long-term expectations is critical.
“If the public begins to expect inflation will remain high over the long term, restoring price stability and maximizing employment would become much more difficult,” he asserted.