Federal Reserve Bank President Alberto Musalem signaled caution on the U.S. economy, warning that inflation remains stubbornly above the central bank’s target while early cracks are emerging in the labor market.
Inflation Outlook
Musalem noted that inflation is currently running about 3% higher than the Fed’s 2% goal, with services inflation showing unusual strength. He added that recently imposed tariffs are contributing to price pressures, though their full effect may take two to three quarters to play out. While he expects their impact to fade within six to nine months, he acknowledged the risk that they could persist longer. As a result, Musalem has revised his inflation assessment slightly downward, factoring in the drag from tariffs.
Labor Market Trends
On employment, Musalem said the U.S. remains near full employment, but signs of softening are visible. Payroll growth has slowed, with downward revisions adding to the weakness. Both labor demand and supply have declined, and with lower immigration flows, nonfarm payroll gains could dip below 50,000 per month. Despite slower hiring, the jobless rate remains steady at 4.2%, and businesses are not yet signaling layoffs — though profit pressures could eventually dampen hiring further.
Policy Approach
Reiterating the Fed’s dual mandate, Musalem stressed the need to balance elevated inflation with emerging labor market risks. He described his stance as data-driven and meeting-by-meeting, saying it is too early to commit to a specific policy path. Importantly, he argued that a 50-basis-point rate cut is not justified by current economic conditions.
Perspective
Musalem emphasized the importance of listening to voices from Main Street and his district, saying more data in the coming months will be critical to clarifying the economic outlook.
