Fed's Musalem: Caution still warranted on inflation

St. Louis Federal Reserve (Fed) President Alberto Musalem struck a cautious and hawkish tone on Thursday, warning that inflation pressures remain elevated despite growing optimism around artificial intelligence and productivity gains.

Musalem said the Fed’s real policy rate remains below the longer-run neutral rate, while longer-term inflation expectations appear to be drifting higher. He stressed that policymakers need to remain focused on returning inflation to the Fed’s 2% target and argued that caution is still warranted given ongoing upside inflation risks.

On AI, Musalem said the data on productivity gains remain inconclusive and warned it would be risky to rely on future productivity improvements to solve today’s inflation problem, particularly while demand pressures remain strong. Still, he added that he would be prepared to adjust his policy views if clearer evidence emerges that stronger productivity growth is helping ease inflation pressures.

Overall, the remarks reinforce the Fed’s broader higher-for-longer narrative and suggest policymakers remain more concerned about inflation persistence than near-term growth risks.