MNI: Fed's Musalem Sees Inflation Risks Skewed To Upside
MNI (WASHINGTON) - Federal Reserve Bank of St. Louis President Alberto Musalem warned Thursday the risk that inflation stalls above 2% or moves higher is skewed to the upside, though his baseline scenario is consumer price growth falls back to 2% and monetary policy moves back to neutral.
"I expect inflation will continue to converge to the FOMC’s 2% target and the labor market will remain near full employment. This baseline scenario requires that monetary policy remains modestly restrictive until inflation convergence is assured, at which point the policy rate can be gradually reduced toward the neutral level as convergence progresses," he said in remarks prepared for The Economic Club of New York.
"I perceive the risk that progress on inflation could stall as being greater than the risk of substantial labor market weakening. And, while not my baseline, there are scenarios where the FOMC could face conflicting dual mandate goals," he said.
Recent surveys show a rising number of firms expecting increased materials costs and have plans to raise their prices in coming months, he noted. Consumers have also indicated some uptick in their inflation expectations, as have market-based measures, he said.
Inflation expectations will be key in determining how to react to stagflation, should that take hold, he said.
"That is why I put a high priority on making sure inflation continues to converge to the FOMC’s 2% target in the current environment of full employment and strong growth," he said.
Musalem assumes the net effect of changes in trade, immigration, regulatory, fiscal and energy policy from the Trump administration to be small in the medium term, but said these changes could materially affect the path of the economy. (See: MNI: Fed In Holding Pattern As Inflation To Stay High-Ex-Staff)