Inflation will move toward 2% target, but risks to outlook are rising, says Fed's Musalem

cnbc.com:

WASHINGTON — The risks for higher inflation are on the rise, St. Louis Federal Reserve President Alberto Musalem said Monday.

During a keynote address at the National Association for Business Economics conference, Musalem noted that his baseline case is for inflation to gradually move toward the central bank's 2% target. This scenario requires inflation expectations to remain anchored and stable, he noted.

However, «near-term inflation expectations have risen substantially over the last few weeks, and that's something I'm watching closely,» Musalem added.

Indeed, the February reading on The Conference Board's consumer confidence index reflected the largest one-month drop since August 2021, as inflation expectations rise. The Institute for Supply Management's manufacturing PMI also showed a sharp increase in prices within the sector for the month.

«Businesses and households are clearly more sensitive to expectations of higher inflation,» Musalem said. «That's why the risks seem more skewed to the upside, but the baseline is for continued disinflation.»

Investors came into 2025 expecting the Fed to lower rates this year. However, the central bank kept rates at their current 4.25%-4.5% range after its January meeting, where it noted that inflation remained «somewhat elevated.»

The CME Group's FedWatch tool also shows that traders are pricing in a 93% likelihood that the Fed will keep rates at their current levels at the central bank's March meeting.

Musalem's remarks come as investors brace for U.S. tariffs on imports from China, Mexico and Canada — with many worried the levies will drive prices higher, thus making it harder for the Fed to ease rates going forward.