St. Louis Fed’s Musalem: The current interest rate level may be maintained “for some time,” and the Federal Reserve is prepared for “adjustments in both directions.”

Federal Reserve officials are facing dual pressures from inflation and employment, with significant uncertainties rising in the policy path.

St. Louis Fed President Alberto Musalem stated on Wednesday that the current interest rate level may remain appropriate for quite some time, but he would support adjusting policy rates in either direction if economic conditions warrant it. He warned that risks on both the labor market and inflation fronts have increased.

Musalem's stance is consistent with that of Fed Chairman Jerome Powell earlier this week. On Monday, Powell said current policy is in the right place, allowing officials to wait and see, and assess the actual impact on the economy and inflation from U.S. strikes on Iran driving up energy prices.

Surging U.S. oil prices have pushed the national average gasoline price above $4 per gallon this week, the first time since August 2022, significantly dampening consumer confidence.

On Hold: Consensus among Officials and Market Expectations

Musalem said he supports all the Fed decisions to keep rates unchanged so far this year.

His baseline scenario is: unemployment rate remains stable near current levels, economic growth is close to potential, and core inflation begins to gradually move towards 2% later this year.

Fed policymakers have kept benchmark interest rates unchanged for two consecutive meetings; based on federal funds futures pricing, market investors currently expect rates to remain at current levels for the rest of this year.

Two-way Risk: Both Rate Cuts and Hikes Considered

Musalem clearly laid out the conditions under which he would support adjusting interest rates, in both directions.

He said that if the labor market worsens and inflation does not pick up, or inflation falls back, he may lean toward supporting a rate cut. On the other hand, he also said, "If core inflation or long-term inflation expectations continue to rise and deviate from 2%," he would support a rate hike.

He warned, "If inflation expectations lose their anchor, not only will it bring higher inflation, but it may also lead to slower economic growth and a weaker labor market."

Concerns About Inflation and the Job Market

Musalem pointed out that the risk of inflation remaining high throughout all of 2026 has increased, putting the hawkish tone of his policy stance on a longer time frame.

Meanwhile, he remains alert to downside risks in the job market. He said that a surge in layoffs could lead to a rapid rise in unemployment, which would be one of the key signals to trigger a rate cut path.

The nonfarm payrolls data to be released this Friday will give officials more reference information on the labor market; the surprisingly weak jobs report in February has further increased market attention to this data release.

Musalem also mentioned the potential impact of artificial intelligence on the economy. He said AI could enhance supply-side capacity, but is currently also driving demand. Its net effect on inflation is still unclear, and this structural variable adds complexity to medium- and long-term policy decisions.

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