St. Louis Fed Pres. Musalem is speaking and he says:
- Fed’s real policy rate is below the long-run neutral rate, longer-term inflation expectations are drifting up, and the labor market remains stable.
- Fed’s caution is warranted given the risk of renewed upward inflation pressures.
- Need a vigilant focus on returning inflation to the Fed’s 2% target.
- Data on the productivity effects of artificial intelligence remain inconclusive, while demand pressures are real.
- It is risky to rely on the prospect of higher productivity growth to solve today’s inflation problem.
- Prepared to adjust policy views if evidence becomes clear that stronger productivity growth is likely to ease inflation pressures.
The comments lean hawkish overall. The speaker emphasized that inflation risks remain elevated, warned against relying on uncertain AI-driven productivity gains to solve inflation, and stressed the need to stay focused on returning inflation to the Fed’s 2% target. Concerns about rising longer-term inflation expectations and the view that the real policy rate is still below neutral also reinforce a cautious stance toward easing policy.
The only modestly dovish element was the acknowledgment that policy views could shift if productivity growth clearly improves and helps reduce inflation pressures, but the current tone suggests the Fed still sees inflation as the bigger risk.
