President Trump’s sweeping new tariffs likely will have no more effect on US inflation after another two or three quarters, said St. Louis Federal Reserve Bank President Alberto Musalem.
Musalem made his remarks in a speech about the US economy and monetary policy at a Peterson Institute for International Economics event in Washington, DC, recently. In the full text of his prepared remarks, he made it clear that his comments were his opinions only, and that other Federal Open Market Committee members may have other ideas.
KEY TAKEAWAYS
- In his opinion, the current modestly restrictive setting of the policy rate is consistent with today’s full employment labor market and core inflation being nearly one percentage point higher than the Federal Open Market Committee’s 2% target.
- Looking ahead, Musalem said he expected the labor market to cool gradually and remain near full employment with risks tilted to the downside. Recent data has further increased his perception of the downside risks to the labor market.
- As a baseline, he said he expected the effects of tariffs will work through the economy over the next two to three quarters, and the effect on inflation will fade after that. He expected inflation to resume convergence toward 2% in the second half of next year.
- However, there is considerable uncertainty, Musalem said, and he saw a reasonable possibility that above-target inflation could be more persistent.
- He said he would continue updating his outlook and his assessment of the balance of risks to seek a forward-looking path of interest rates that best positions monetary policy for achieving and maintaining maximum employment and price stability for the US.
ECONOMIC RISK
The pace of economic activity picked up in the second quarter, propelled by higher consumer spending and solid growth in business fixed investment, Musalem’s prepared remarks said. Real GDP grew at an annual rate of 1.4% in the first half, which was somewhat below estimates of long-run potential.
He expected output growth at a similar rate in the second half of this year, before it returns to potential. The policy uncertainty that has held back business and household spending continues to lift, and he expected some stimulus to growth from fiscal policy.
Mortgage origination and refinancing activity remain sluggish, despite a recent decline in mortgage rates, Musalem said in the prepared remarks. Rising inventories, slowing home price appreciation and low turnover suggest the weak housing market poses some downside risk to the pace of economic activity.
Available data suggest the US economy is near full employment, he said. Also, the vacancies-to-unemployment ratio, initial unemployment claims, the pace of job transitions are among measures consistent with a labor market near full employment.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $242.00 per cwt to $244.90, compared with last week’s range of $239.00 to $245.20 per cwt. FOB dressed steers and heifers went for $379.65 per cwt to $384.81, compared with $373.13 to $383.79.
The USDA choice cutout Thursday was down $1.80 per cwt at $414.21 while select was up $0.04 at $387.77. The choice/select spread narrowed to $26.44 from $26.28 with 94 loads of fabricated product and 48 loads of trimmings and grinds sold into the spot market.
The USDA-listed the weighted average wholesale price for fresh 90% lean beef was $432.82 per cwt, and 50% beef was $152.00.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.30 to $1.40 a bushel over the Sep corn contract, which settled at $3.99 3/4, up $0.02.
The CME Feeder Cattle Index for the seven days ended Wednesday was $361.35 per cwt, down $4.08. This compares with Thursday’s Sep contract settlement of $359.82, down $2.25.