MNI BRIEF: Inflation Risks Skewed To Upside - Fed's Musalem
MNI (WASHINGTON) - Federal Reserve Bank of St. Louis President Alberto Musalem said Monday his baseline outlook is for further disinflation but risks are skewed to the upside.
"My baseline is for inflation to continue to converge towards 2% gradually. That requires monetary policy to remain modestly restrictive until there's confidence that inflation is indeed converging towards 2%," he said in Q&A at a NABE conference, taking note of surveys recently showing higher near-term inflation expectations. "Near term inflation expectations have risen, have risen substantially over the last few weeks. So, that's something that I'm watching closely, and I wouldn't want to see those near term inflation expectations feed into longer term inflation expectations."
"The country, the world, just went through a high inflation episode, only two years back, so businesses and households could be more sensitive than otherwise to expectations of higher inflation," Musalem said. "That's why the risks seem skewed to the upside, but the baseline is for a continued disinflationary path." (See MNI: Fed In Holding Pattern As Inflation To Stay High-Ex-Staff)
Musalem said if his baseline outlook turned out to be wrong, with much stronger growth, inflation not converging towards 2%, and rising inflation expectations, then alternative policies could be considered. "More restrictive than the baseline, that doesn't mean hikes. It just means you may need to keep rates [higher] for longer, until you see inflation converging. That's a very important distinction," he said.