St. Louis Fed Chief Warns More Rate Hikes “Necessary, and Soon”

Alberto Musalem, President and CEO of the Federal Reserve Bank of St. Louis, told the Shadow Open Market Committee in New York on October 30th that inflation remains “too high” and that further monetary tightening will likely be needed in the near term. Citing September PCE (Personal Consumption Expenditures) data showing both headline and core inflation running at 3% or higher, Musalem said the risks to the inflation outlook are “skewed toward persistent above-target inflation.” His remarks came the same week gold touched a high of $3,965 per ounce, with a trading range of $81.70, a move that reflects persistent unease among investors about whether the Fed’s rate-setting apparatus can actually bring inflation back to heel.

Musalem laid out two possible paths for inflation over the next 18 months. In the scenario he considers more likely, inflation stays meaningfully above the Fed’s 2% target unless policymakers remove additional monetary accommodation. In the less likely scenario, inflation drifts back to target without further tightening. Given that framing, Musalem argued that “additional firming of monetary policy will be necessary, and soon,” reasoning that smaller, incremental rate increases now would be less disruptive to the economy than larger, abrupt moves later. He also quoted Fed Chairman Warsh, who described the central bank’s recent rate increase as “removing a dose of accommodation,” adding his own view that policy remains accommodative overall despite that move.

The labor market, for now, appears stable on the surface. Unemployment sits at 4.2%, which Musalem noted is right at the median of FOMC (Federal Open Market Committee) participants’ long-run projections from September. But he was careful to point out that stability in the headline numbers masks a more uncomfortable reality underneath it: nominal wage growth has not kept pace with inflation for most workers, leaving many Americans “falling behind in real terms” even as job figures hold steady. He also flagged that the housing market remains “significantly challenged” by high mortgage rates, elevated building costs, and ongoing supply shortages, conditions that are not obviously solved by further rate hikes alone.

Musalem devoted part of his remarks to the broader costs of inflation itself, invoking monetarist economists Allan Meltzer, Karl Brunner, and Anna Schwartz, who argued in the 1970s that price stability is a prerequisite for maximum employment rather than a tradeoff against it. He called inflation “a distortionary tax, and a regressive one at that,” noting that business leaders, community groups, and elected officials routinely raise concerns with him about its effects on the people they serve. He also acknowledged that survey-based measures of inflation expectations have “drifted higher” recently, attributing much of that shift to rising energy and commodity prices. As Peter Schiff put it on a recent episode of his podcast, “inflation is an expansion of the money supply, which would include credit,” and that expansion traces back to government monetary policy itself, not to forces outside the Fed’s control.

Musalem’s comments add to a growing chorus of Fed officials acknowledging that inflation has proven more stubborn than hoped, with rising long-term bond yields already signaling that markets expect higher real policy rates ahead. He warned that if the public loses confidence in the Fed’s commitment to price stability, nominal yields “would likely rise further,” pushing up financing costs across the economy. Whether the Fed can restore that confidence through continued rate adjustments, or whether the damage from years of above-target inflation is already baked in, remains an open question markets are still pricing in.

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