Wednesday St. Louis Fed president Alberto Musalem said he is more worried that inflation will stall beyond the central bank’s 2% long-term annual target than he is certain inflation resulting from higher tariffs on imports to the U.S. would be fully temporary.
Speaking to Paducah, Ky., business leaders, Musalem said tariffs have direct and indirect inflationary effects.
For example, the St. Louis Fed staff projects that the announced tariffs might raise inflation by as much as 1.2 percentage points. One-time direct effect is calculated to be roughly half a percent point. The indirect impacts are calculated to be seven-tenths of a percentage point.
Musalem said it could be reasonable for the Fed to “lean against” the indirect consequences while neglecting the direct impact of rising tariffs on the price level.
It will be difficult, he pointed out, to separate the impacts.
“I would be cautious of assuming that the impact of tariff increases on inflation will be entirely temporary, or that a full look-through strategy will inevitably be appropriate,” he remarked.
Jerome Powell, the Fed chair, made headlines last week when he said that the impact of tariffs on inflation would be transient – a term whose use came back to haunt then-Treasury Secretary Janet Yellen, who preceded Powell as Fed chair, and other members of the Biden administration when the period of high inflation proved more long-term.
From the archives (November 2024): JPMorgan strategist advises Janet Yellen to have embraced Alexander Hamilton’s economic model.
Also see (January 2025): Yellen claims U.S. could have maintained inflation steady – if it threw up to 15 million people out of job.
“I wish he had used a different word,” Nationwide chief economist Kathy Bostijancic said in an interview.
Powell himself had used the “transitory,” or temporary, accurate portrayal of the U.S.’s inflation picture, as it turned out, during Trump’s first White House term before joining those mistakenly projecting that pandemic-era inflation would be tamped down without an aggressive campaign of interest-rate increases, instead of hitting, as it did, a multidecade high in 2022.
Particularly if the tariffs are implemented over an extended period of time, Bostijancic said it will be difficult for the Fed to estimate their inflationary impact.
See: Powell calls tariff-generated inflation “transitory.”
She predicted the Fed will do less than the three cuts anticipated by financial markets and won’t be able to lower rates until the fourth quarter.
Musalem said the Fed has to be ready to hike interest rates should second-round effects show up or if consumers and companies begin to expect further inflation.
Recent polls show, Musalem noted, more companies want to increase prices in the next months or have already done.
Businesses in the Federal Reserve Bank of St. Louis’s area—which includes portions of Missouri, Illinois, Indiana, Kentucky, Tennessee, Arkansas and Mississippi—have indicated that they anticipate passing more materials prices on to their consumers, he added.
