Fed's Musalem: Rates may need to stay on hold for a while as oil threatens inflation outlook

April 16 — Federal Reserve official Musalem said elevated oil prices could lift core inflation for the rest of this year to nearly 1 percentage point above the Fed's 2% goal, a backdrop that could warrant keeping interest rates unchanged. He said some pass-through from oil to core inflation is likely. By year-end, he expects the underlying pace of price gains to be "slightly below 3%, perhaps around 3%," while warning risks remain skewed to the upside. Musalem said the Fed may hold its policy rate in the current 3.50%–3.75% range for "a period of time" as officials track incoming inflation, employment and broader economic data over the next few months, a stance he said is shared by many colleagues. He added that the impact of last year's tariff hikes may gradually fade this quarter and that housing inflation is easing. Even so, service-sector inflation remains high, which he linked to rising oil prices. If inflation starts to re-accelerate and risks unmooring inflation expectations, he said he would be open to further rate increases. Musalem also described the oil market as the third negative supply shock in 12 months. Combined with higher tariff rates and tighter immigration policies, he said both the inflation outlook and the labor market face added risks that could weigh on growth. He expects economic growth to slow this year but remain in a 1.5% to 2% range. (Jin10)