Fed officials are already saying they’ll need to get back to hiking rates

Alberto Musalem, President and CEO of the Federal Reserve Bank of St. Louis, speaks to the Economic Club of New York, in New York City, U.S., Feb. 20, 2025.

Brendan McDermid | Reuters

St. Louis Federal Reserve President Alberto Musalem said Friday that firmer monetary policy will need to be implemented in the near future.

"I judge that additional firming of monetary policy will be necessary, and soon," Musalem said in prepared remarks for the Shadow Open Market Committee, a gathering of economists focused on the central bank.

Musalem's comments offer the first morsels of insight into what leaders at the Fed see next following Wednesday's decision to hold interest rates steady. It will also bolster the view among investors that the Fed will return to hiking rates at its next meeting in December. Fed funds futures traders are pricing in a roughly 76% likelihood of the Fed lifting rates by a quarter percentage point at that gathering, according to CME's FedWatch tool.

"Incremental adjustments made earlier are usually less disruptive than larger and abrupt actions taken later," Musalem said. "Moving sooner in smaller steps while inflation expectations are anchored has a better chance of succeeding without adverse impact on the labor market or economic growth."

Musalem broadly spoke positively about the state of the U.S. economy, which he described as "resilient." He pointed to Thursday's data on U.S. GDP, which showed a stronger-than-expected growth rate of 3.4%.

He said there are several factors boosting the economy, including the artificial-intelligence buildout and financial conditions that "remain accommodative."

Musalem said the labor market has been "remarkably stable and balanced." The unemployment rate of 4.2% sits at the median of long-run projections by participants in the Federal Open Market Committee, the group tasked with setting interest rates, he noted. Musalem is not a voting member of the FOMC this year, and isn't expected to have a vote until 2028.

But Musalem warned that inflation is "too high," citing the personal consumption expenditures price index released Thursday that showed annual inflation above 3%. Fed officials have been closely monitoring inflation expectations among consumers and investors to ensure they don't get too far above the central bank's long-term target of 2%.

He said there's a likely scenario where inflation remains above 2% into the future unless the Fed adjusts monetary policy.

"The best that monetary policy can do now for employment and economic growth is to restore price stability in a timely manner," Musalem said. "The short-run economic costs of reducing inflation are less when the central bank acts before inflation has become entrenched and is expected to persist."