St. Louis Fed’s Musalem cautions about looking through oil price shock
St. Louis Fed president Alberto Musalem cautioned Wednesday about looking through the spike in oil prices and is set on holding interest rates steady for some time.
“It might be tempting to always ‘look through’ the effects of negative supply shocks on inflation and to focus on their impacts on labor markets and growth,” Musalem said in a speech at the American Enterprise Institute in Washington, D.C. “History suggests caution is warranted, however, especially when underlying inflation is persistently above target.”
Musalem said that while the oil price shock today differs from the 1970s, the public is sensitive to inflation now, and an increase in prices may be more likely to have a longer-lasting impact on inflation and inflation expectations. Musalem noted that it’s difficult to identify how much underlying inflation is due to a temporary price spike rather than strong demand pressures.
While he had been expecting inflation to begin to edge down in the second half of the year as the impact of tariffs fades, Musalem said geopolitical developments have clouded that forecast. He now sees more risk of persistent above-target inflation throughout 2026.
“The recent increases in energy prices will put upward pressure on headline inflation in the near term with some pass-through to core inflation,” he said.
President Trump said Tuesday that the war could end in two to three weeks. If that proves true, Musalem said he would still be looking at the impact of the conflict’s fallout, including what kind of risk premium would remain in energy markets one to three years out and how that would affect oil prices. He added that he’d also look at the level of economic uncertainty and whether tighter financial conditions persist.
“I’ll be looking for the echoes, I would say, of what’s happened, because even if the war were to end, it’s going to take time to bring a lot of the damaged capacity back on stream,” he said.
Federal Reserve Bank of St. Louis president Alberto Musalem speaks to the Economic Club of New York on Feb. 20, 2025. (Reuters/Brendan McDermid) ·REUTERS / Reuters
Musalem referenced a March business survey that found firms were passing on higher energy prices to their customers and recorded the largest increase in selling prices since August 2022.
He said inflation in “core” services excluding housing was already proving sticky, and rising prices for core goods due to tariffs have also contributed to what he called “sustained inflation” in recent months.
St. Louis Fed researchers estimate that tariffs can explain about half of the excess 12-month inflation above 2%. Musalem said he expects those effects to fade over the next couple of quarters.
Musalem’s comments come after Kansas City Fed president Jeff Schmid suggested Tuesday that the Fed should not look through the oil price shock from the Iran war, noting recent developments in the Middle East are likely to add further pressure to inflation.
Fed Chair Jerome Powell noted Monday that the central bank has traditionally looked through oil price shocks and not taken action, but acknowledged that the increase in oil prices is hitting during a prolonged period of higher inflation.
While Musalem sees a risk for higher inflation, he also sees downside risk to the job market. He noted that while the unemployment rate remains close to a level indicating a balanced job market, he sees risks as “weighted to the downside.”
He pointed out that three-month rates of total and private payroll growth have been narrowly concentrated in just a few sectors and have been at the low end of estimates of the so-called breakeven rate needed to prevent the unemployment rate from rising.
Musalem noted that surveys suggest payroll growth slowed further in March as firms reported greater reluctance to hire amid heightened geopolitical uncertainty.
A “now hiring” sign sits on the side of the road in Garland, Texas, on March 23, 2026. (AP Photo/LM Otero) ·ASSOCIATED PRESS
“With the pace of hiring already low, an increase in layoffs could lead to a rapid increase in the unemployment rate,” he said.
Musalem said the Fed’s benchmark policy rate, adjusting for inflation, appears to be in the lower range of neutral — a level designed to neither spur nor slow growth.
He said that level is “appropriate” given his economic outlook.
“Policy is well-positioned to address risks to both dual mandate objectives, and I expect the current setting of the policy rate will remain appropriate for some time,” he said.
Musalem also noted that while he is hopeful AI will boost productivity and could push down inflation, the Fed should not act based solely on that expectation.
“I believe it would be risky to ease monetary policy solely on the prospect of a future increase in productivity growth, especially with demand pressures at play and inflation running persistently above target today,” he said.
Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.
