Fed must ‘lean on’ inflation driven by continuous rates, Musalem said

President St. Louis Federal Reserve Alberto Musalem said on Friday that he carefully witnessed whether the increase in short -term inflation expectations was seeping into long -term expectations, a development that could make inflation combat work far more difficult and reduce the flexibility of the US central bank to respond to weaknesses in the labor market.

Recording high uncertainty over the effects and time of tariffs and other new policies and “different possibilities” that inflation repeatedly even when the labor market softened, Musalem said Fed’s policy was well positioned and must remain vigilant.

“I will be aware by assuming a higher tariff impact on inflation will only be short or limited,” Musalem said in a statement prepared for shipping to the Arkansas Banker Association. “I consider it right to ‘lean on the’ second round of the effect of monetary policy, although it distinguishes between the underlying inflation and the direct tariff effect, indirect and the second round tends to challenge in real time.”

There has been a slight progress of inflation since mid -20124 and the risk has increased that it will increase in the short term during the entrance fee, said Musalem. And while the “textbook” approach for tariffs is to treat its effects as an event one time that must be ignored by the central bank, it is a risk when inflation has increased, he said.

Market data and most surveys show the expectations of long -term inflation anchored, with the University of Michigan survey showing an increase to an “important” exception, he said.

“If long -term inflation expectations are anchored, the monetary policy approach is responsive to work problems and feasible price stability,” he said. “But if people start expecting inflation to remain high in the long run, the task of restoring price stability and maximum work will be much more difficult.”
Source: Reuters