WASHINGTON: The US Federal Reserve’s battle to bring down inflation to target is at risk of stalling as concerns rise about the cost of tariffs, a senior bank official said Thursday.
Speaking in New York, St. Louis Fed President Alberto Musalem said he still expected inflation would “converge” around the Fed’s long-term target of two percent.
Musalem, who is a voting member of the Fed’s rate-setting committee this year, said he expected the labor market to remain close to full employment, putting the Fed in a position to keep its key lending rate “modestly restrictive” for now.
“Various changes in trade, immigration, regulatory, fiscal and energy policies, or other changes in the economic environment, could materially affect the path of the economy,” he said, referring to US President Donald Trump’s economic proposals.
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He added that he expected “the net effect on inflation and employment of all such policy changes will be small in the near to medium term.”
“Around this baseline scenario, the risks of inflation stalling above two percent or moving higher seem skewed to the upside,” he said, flagging recent surveys in which businesses said they expect they will need to raise prices in the coming months.
Many economists expect Trump’s proposals to hike tariffs and deport millions of undocumented workers could stoke inflation, although there is a divergence of views about how big the impact would be.
Musalem noted that it could be appropriate to ignore any small, time-limited inflationary uptick due to tariffs or immigration, on the assumption that prices would then stabilize.
“However, a different monetary policy response could be appropriate if higher inflation is sustained, or longer-term inflation expectations rise,” he said.
“In that scenario, a more restrictive path of monetary policy relative to the baseline path might be appropriate,” he added.
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