Fed's Musalem Says Further Rate Hikes Likely Needed as Inflation Stays Above Target

St. Louis Fed President Alberto Musalem said on Sept. 21 that the Federal Reserve will likely need to raise interest rates further to bring inflation back to its 2% target, warning that underlying price pressures are running about a percentage point above target and "moving in the wrong direction." "Earlier and incremental policy firming is better and less disruptive than later and larger and potentially more abrupt policy action," Musalem said in an interview with Reuters. He called the current 3.75%-4.00% policy rate "on the accommodative side." The Fed's main inflation gauge, the Personal Consumption Expenditures Price Index, stood at 3.7% year-over-year in July, up from 2.3% in April 2025, driven by import tariffs, higher fuel costs linked to the U.S.-Israeli war with Iran, and rising commodity prices tied to AI investment. Musalem said the labor market is not fueling inflation and does not need to cool.