The president of the Federal Reserve Bank of St. Louis is optimistic about the country’s economy. Alfredo Musalem spoke Friday at a Springfield Area Chamber of Commerce event.
Musalem said inflation is currently running at about 3%, which is a full percentage point above the target of 2%. At the same time, he said the labor market is still at full employment but is showing some signs of potential risks and weaknesses.
Musalem said he and his team blame tariffs for only part of the higher-than-desired inflation rate.
"Our team estimates that only about 2/10, maybe 3/10, of the 3% is tariffs, so only about 10% of the inflation that we're seeing so far is tariffs," he said. "On the other side, the economy today has a labor market that looks like it's at full employment. When you look under the surface, though, there is some risk that the labor market could weaken. So that's the economy. Those are the facts today."
Musalem said he expects the impact of tariffs on inflation to fade after two to three quarters pass, "so, by the second half of 2026, I expect tariffs to have played themselves through the economy, for prices to have increased and then stop increasing after that at least due to tariffs and for inflation to continue to return to convergence towards 2%."
But he said inflation could turn out to be more persistent "for reasons relating to tariffs or not relating to tariffs." And he said the labor market could weaken by more than currently expected.
But he said financial and financing conditions are very accommodative of a growing economy.
While Musalem said he’s open minded about further reducing interest rates to protect against the labor market weakening, "I believe that we have to tread with caution because there's limited room for further easing before monetary policy could become overly accommodative, and I believe that monetary policy should continue to lean against persistence and inflation, whether that persistence comes from tariffs, from a lower growth in labor supply or for any other reason."
He said the Eighth District is doing fairly well. While some sectors are doing better than others, according to Musalem, "by and large, the economy is doing okay."
He said GDP growth is expected to remain at a healthy level in the fourth quarter. And he expects the economy next year to potentially grow at slightly above potential.
