St. Louis Federal Reserve President Alberto Musalem told CNBC on Thursday that tariffs are feeding through to inflation, which is running close to 3%.
Key takeaways
“Expecting most of the impact of tariffs on inflation to fade in 6 to 9 months, but it could be more persistent.”
“Economy is around full employment.”
“There are some signs of labor market weakening.”
“Take a meeting by meeting approach and bring an open mind each time.”
“Have revised sense of labor risks slightly higher, inflation risks slightly lower.”
“Will further revise view as more data comes in, too early to say what is the right decision for September.”
“Seeing risks that inflation could be more persistent, still only three months into the period of higher tariffs.”
“Economy is growing slightly less than 1%, posing downside risks to the job market.”
“Not hearing from businesses that they are on the verge of layoffs.”
“Elected officials are entitled to have views about monetary policy, but the fed’s job is to listen to main street, businesses in the district.”
“If the Fed were to weigh the labor market side more and reduce rates aggressively that could lead to higher inflation expectations and be counterproductive.”
“A reasonable probability tariff impact on inflation will be more persistent.”
“A half point cut is not supported by the state of the economy or the data.”
Market reaction
These comments by Musalem received a neutral score of 5.4 from FXStreet Fed Speech Tracker. Meanwhile, the US Dollar Index stays in positive territory at around 98.00.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
(This story was corrected on August 14 at 14:37 GMT to say in the first line that St. Louis Federal Reserve President Alberto Musalem’s interview with CNBC was on Thursday, not Monday).
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