Fed's Musalem Says Further Rate Hikes May Be Needed, Warns Against Delay

St. Louis Fed President Alberto Musalem said Monday the Federal Reserve may need to raise interest rates further to contain inflation driven by resilient demand and supply-side price shocks, and that acting early would be less disruptive than waiting. "I judge that, absent further policy tightening, the probability that inflation will be materially above 2% in 18 months is higher than the probability it will be at 2%," Musalem told Reuters. He said gradual, early tightening is preferable to larger, more abrupt moves later. Musalem, who is not a voting member of the FOMC this year, declined to specify how high rates should go. Core inflation remains roughly a percentage point above the Fed's target and is "moving in the wrong direction," he said, noting PCE inflation rose 3.7% year-over-year in July, up from a recent low of 2.3% in April when the Trump administration began pursuing global import tariffs. He cited higher fuel costs after U.S.-Israel hostilities with Iran and rising copper prices tied to AI investment. Musalem said the current 3.75%-4.00% benchmark rate remains "on the stimulative side" and that the labor market is "stable, balanced and close to full employment," arguing it is not a source of inflation. Investors expect three more quarter-point hikes through April, with roughly even odds for an October move before the U.S. midterm elections.