Musalem: More Policy Tightening Necessary to Lower Inflation

• The economy is currently quite robust, and the Fed’s top priority should be reducing inflation.
• Musalem’s business contacts are primarily concerned with inflation, not with the labor market.
• Given the present inflation level, the Fed needs to consider raising rates.
• He approaches every meeting without preconceptions.
• Additional monetary policy tightening will be needed to return inflation to its target.
• Inflation expectations in the market remain stable, and he does not see the Fed’s credibility under challenge.
• Nominal yields are climbing because real yields are rising, partly driven by rate expectations.
• He warned that consumer strength might weaken.
• The labor market is broadly balanced and stable, and there is no necessity to cool it to reduce inflation.

Alberto Musalem, president of the St. Louis Fed, stated that additional policy tightening is required to get inflation back to the target.

He remarked that the economy is quite strong and the Fed’s best course is to bring inflation down. The current inflation level means the Fed must consider rate hikes, he added, though he attends each meeting with an open mind.

Musalem characterized the job market as broadly balanced and stable, arguing that cooling it is unnecessary to lower inflation. His contacts in the business community are more concerned about inflation than jobs. He did note the risk that consumer vigor could fade.

Regarding markets, he stated that inflation expectations stay anchored and the Fed’s credibility is not being challenged, in his view. He ascribed the increase in nominal yields to rising real yields, partly due to rate expectations.

These remarks place Musalem on the hawkish end of the committee, contrasting with the more dovish stance taken last week by New York Fed President John Williams and Vice Chair Philip Jefferson, who suggested they were not inclined to raise rates again this month.