St. Louis Fed’s Musalem Warns of Further Rate Hikes to Combat Inflation

Musalem argues that current underlying inflation, even excluding volatile supply-side factors, sits roughly one percentage point above target and is trending in the wrong direction. He advocates for gradual, proactive tightening, suggesting that early intervention is far less disruptive than the abrupt, large-scale measures that might be required if the Fed delays action.

The Personal Consumption Expenditures Price Index rose to 3.7% in July, a sharp climb from the 2.3% low recorded in April 2025. This upward pressure stems from a confluence of factors, including global import tariffs, the impact of the conflict between the US, Israel, and Iran on fuel costs, and a copper price rally fueled by the artificial intelligence boom. Despite these challenges, Musalem maintains that the labor market remains stable and balanced, noting that cooling employment is not a prerequisite for hitting the Fed's inflation target. Investors are currently pricing in three additional 25-basis-point hikes through April, with an even chance of an increase as early as October.