Overview
Federal Reserve Bank of St. Louis President Alberto Musalem said the central bank’s current stance on interest rates - a policy range of 3.5% to 3.75% - is likely to remain appropriate for an extended period as officials weigh competing risks to employment and inflation. Speaking at the American Enterprise Institute in Washington, Musalem noted that the real policy rate, after adjusting for expected inflation, was already in the neutral range prior to recent energy-price increases and has moved lower since then.
Baseline outlook and key uncertainties
Musalem outlined a baseline scenario for 2026 in which real gross domestic product grows close to its potential, the unemployment rate holds roughly at current levels, and core inflation gradually eases toward the Fed’s 2% objective later in the year. He emphasized considerable uncertainty around that central forecast and said the risks are tilted unfavorably on both sides - toward a softer labor market and toward inflation that proves more persistent above target.
He attributed part of the deceleration in real GDP growth in the fourth quarter to the government shutdown, while noting that final sales to private domestic purchasers rose at a respectable pace. Tracking forecasts suggest first-quarter growth was approximately in line with potential.
Consumer spending and fiscal supports
Consumer outlays were soft during the first two months of 2026, Musalem said, attributing some of the weakness to winter storms. Still, he identified solid wage growth, fiscal policy and wealth effects as supports for household spending in coming quarters. He highlighted that federal income tax refunds are projected to average about $1,000 more per household in 2026 than in the prior year and that households are receiving additional relief from lower withholding.
That said, Musalem flagged external factors that could damp consumer and business spending in the first half of 2026. Uncertainty stemming from the conflict in the Middle East and from unsettled tariff policy could weigh on demand. He pointed out that higher prices for fuel, aluminum and fertilizer - commodities sensitive to supply chain disruptions in the region - could also subtract from spending.
St. Louis Fed staff estimates cited by Musalem suggest the rise in fuel prices since the start of the conflict could effectively reduce consumer purchasing power by an amount equivalent to some 10% to 15% of this year’s tax-relief windfall for each quarter that fuel prices remain around current levels.
Labor market dynamics
The labor market has been cooling gradually over the past 18 months and recent indicators suggest it may have reached a more stable, "low hire, low fire" state, Musalem said. The unemployment rate has trended up modestly since mid-2023 but remains close to the natural rate. Meanwhile, the ratio of job openings to unemployed workers has declined slightly since 2023 but still stands well above its long-run average.
Musalem described the risks to the labor market as skewed to the downside. He noted that three-month rates of total and private payroll growth have been narrowly concentrated in a handful of sectors and sit at the lower end of estimates of the breakeven pace of hiring needed to prevent the unemployment rate from rising.
Inflation picture and role of tariffs
On inflation, Musalem reported that core personal consumption expenditures, the Fed’s preferred inflation gauge, was running at 3.1% in January and was estimated to be little changed in February. He signaled particular concern about stickiness in core services inflation excluding housing, and said rising prices for core goods have also helped to sustain inflation in recent months.
St. Louis Fed staff work cited by Musalem indicates that tariffs can account for roughly half of the excess in 12-month inflation above the 2% target. He said the influence of tariffs implemented last year should dissipate over the next couple of quarters, but that geopolitical developments have clouded his prior expectation that core PCE would begin to move toward 2% in the second half of 2026. As a result, he now sees a greater risk that inflation will remain persistently above target through 2026.
Recent increases in energy prices are expected to push headline inflation up in the near term and to have some pass-through into core measures. Musalem pointed to a March business survey that found firms passing higher energy costs on to customers, recording the largest rise in selling prices since August 2022.
Policy trade-offs and conditional posture
Musalem described a conditional approach to future policy moves. He said he could support additional easing of the policy rate if the risk of a materially weaker labor market became clearer, provided that inflation and inflation expectations are not moving persistently higher. Conversely, he could back lowering the policy rate to prevent the real rate from rising if actual or expected inflation fell.
At the same time, he said he could support raising the policy rate to avoid an inadvertent real easing that would result from holding the nominal policy rate steady if core inflation or medium- to long-term inflation expectations moved persistently higher and away from 2%.
This account reflects Musalem’s public remarks and St. Louis Fed staff estimates he cited; it does not introduce additional data or analysis beyond his comments.