Musalem says too soon to know if tariff inflation will be temporary, reinforcing Fed divide

St. Louis Federal Reserve president Alberto Musalem said Thursday he expects inflation to increase on account of tariffs, but he is undecided about whether that will be a one-time increase or longer lasting.

It could take into the fourth quarter or first quarter of next year to determine whether tariffs are still working through the economy, he said, noting that he expects the level of the average tariff to be 8% or 9% by June compared with 2.5% before April.

“So it's going to take time for the tariffs to settle and determine what people are actually paying and therefore how they're passing through,” he said.

Musalem’s cautionary comments underscore the differences of opinion within the central bank over the impact of tariffs on inflation and thus the path for setting interest rates in the coming months.

President Trump has repeatedly called on the Fed to easy monetary policy, citing what he views as no inflation thus far from tariffs and the savings that could be made if the US were paying lower interest on its debt.

Two Fed governors — Michelle Bowman and Christopher Waller — appear to agree with the president and have argued for rate cuts as soon as the meeting this month, on July 28-29, due to their belief that any inflation from tariffs will be temporary.

But many others at the central bank are not so sure tariff inflation will just come and go and want more time to assess when cuts should begin. They include Federal Reserve Chairman Jerome Powell, who has cited a resilient economy as he argues for a patient approach.

The strength of the economy, he has said, gives the Fed time to assess whether Trump's tariffs will, in fact, push inflation higher over the summer.

These divisions were apparent in the minutes from the Fed’s policy meeting in June that were released Wednesday.

There were some members participating in that last meeting who said they don’t see any rate cuts happening this year because they believe there is “meaningful” upside risk to inflation given elevated short-term inflation expectations.

Most thought that upward pressure on inflation from tariffs may be “temporary or modest” and thought lowering rates some time this year would be appropriate.

But a “couple” said they would be open to cutting rates as soon as the next meeting in July.

One risk that inflation turns out to be longer lasting, Musalem said Thursday, is that tariffs are being applied to intermediate goods — items like steel, aluminum and copper that are used to make products — and that could drive up prices for all products, even those not imported.