Fed May Need Further Rate Hikes to Combat Elevated Inflation

St. Louis Fed President Alberto Musalem believes that the US Federal Reserve may need further rate hikes to combat inflation. He stated that strong demand and a broader commodity price shock are keeping inflation elevated, which is causing concerns about reaching the target of 2%.

Musalem emphasized the importance of maintaining sufficiently restrictive monetary policy to bring inflation back on track. He believes that this would allow the Fed to return inflation to its target in around 1.5 years while giving time for tighter monetary policy to take effect on the economy.

According to Musalem, both persistent demand and recurring supply factors are contributing to keeping inflation risks elevated. Without further policy restraint on inflation, it is more likely that inflation will be substantially above the target of 2% in 18 months than at the target itself.

Musalem also noted that acting earlier with gradual policy tightening would be less disruptive than delaying action and potentially requiring larger and more abrupt measures later.