Fed Official Flags Upside Inflation Risks, Warns of Stagflation Threat

St. Louis Fed President Alberto Musalem expressed concerns Thursday about the potential for persistent inflation and the risk of stagflation, posing a dual challenge to the US economy.

He emphasized the need for confidence that inflation is headed back to the Fed’s 2% target before any further policy adjustments are considered, advocating for a patient approach.

While his base case remains for inflation to return to the 2% target, Musalem sees the risks as skewed to the upside. He noted the rise in inflation expectations, suggesting that if this trend continues, it could complicate the Fed’s efforts.

Specifically, he highlighted scenarios where progress on lowering inflation stalls, or even worse, where inflation accelerates alongside a weakening labour market.