Federal Reserve's Musalem: Inflation Expectations Warrant Close Monitoring, and the Risk of Stagflation Should Be Considered

Remarks of Officials

Summary:

Given robust economic expansion, a stable labor market, and inflation persisting above the target, St. Louis Fed President Musalem supports maintaining the federal funds rate target range at 4.25%-4.50%. He indicated that the FOMC may face conflicting dual mandate objectives.

On February 20, St. Louis Fed President Alberto Musalem delivered remarks at the Economic Club of New York in New York City, the details of which are as follows:

The U.S. economy exhibits robust strength, with both GDP levels and growth rates at or exceeding long-term potential. Consumer spending continues to be a key driver of expansion. Personal consumption expenditures surged at a robust 4.2% in the fourth quarter, the highest for any quarter in 2024. Business confidence has improved over the past three months, accompanied by increased planned capital expenditures.

Inflation has significantly receded from its mid-2022 peak, yet it remains above the FOMC's 2% target, and certain measures of inflation expectations have recently risen. The January CPI report revealed substantial monthly increases in goods, services, and housing prices, as well as in both core and overall inflation rates. Monetary policy is moderately restrictive following a 100-basis-point rate cut in the fall, though less so than six months prior. This shift may necessitate a more hawkish stance from the Fed.

The labor market remains robust, with employment risks appearing broadly balanced and recent indicators suggesting some strengthening. Over the past three months, non-farm payrolls have increased by an average of 237,000, exceeding the break-even rate, and the unemployment rate has fallen to 4%. While job openings and the quits rate have moderated, the rate of layoffs remains low. Although average hourly earnings and other measures of employment costs have shown steady growth, the labor market is not a significant source of inflationary pressure, as productivity has also improved.

Overall, the risk of inflation expectations becoming unanchored is elevated, given strong economic growth, a solid labor market, supportive financial conditions, core inflation exceeding 2%, and some recent increases in inflation expectations, compared to a scenario where the economy has excess capacity and consumers and businesses have not experienced high inflation. If inflation persists above the target level or expectations continue to rise, a more restrictive monetary policy stance may be warranted.

Federal Reserve's Musalem

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Federal Reserve's Musalem: Inflation Expectations Warrant Close Monitoring, and the Risk of Stagflation Should Be Considered

Risk Disclosure