FOMC Will Need to Raise Interest Rate 'Soon' to Tame Inflation, St. Louis Fed's Musalem Says

03:33 PM EDT, 10/30/2026 (MT Newswires) -- The Federal Reserve will likely need to tighten monetary policy "soon" to bring inflation down to its 2% target in a timely manner, St. Louis Fed President Alberto Musalem said Friday. Earlier this week, the central bank's Federal Open Market Committee held its policy rate steady in a divided decision. The dissenters, Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack, preferred a second consecutive 25-basis-point hike at the meeting, the FOMC said Wednesday. Current monetary policy continues to be accommodative, Musalem said Friday in remarks prepared for delivery at an event in New York. "I judge that additional firming of monetary policy will be necessary, and soon," Musalem said. He will become an FOMC voting member in 2028. Markets are pricing in a 70% probability that the Fed will raise interest rate by 25 basis points in December, with the remaining odds in favor of a pause, according to the CME FedWatch tool. "The short-run economic costs of reducing inflation are less when the central bank acts before inflation has become entrenched and is expected to persist," Musalem said. "Acting sooner and incrementally now is likely to be less disruptive or costly than delaying and being forced to take large, abrupt actions later." Inflation is elevated and broad based, with the headline and core prices continuing to run at 3% or above, Musalem said. Core inflation excludes the volatile food and energy components. "I perceive meaningful risk that above-target inflation will persist longer than consistent with price stability," he said. Musalem outlined two inflation scenarios for the next 18 months, with the more likely one envisaging high prices if the Fed doesn't tighten policy further, Musalem said. However, if inflation pressures ease due to factors including lower energy prices, further policy firming won't be needed, he said, adding that such a scenario is "less likely but plausible." The US economy remains resilient, while the labor market is "balanced around full employment," Musalem said. "The (artificial intelligence-driven) boom in capital expenditures and wealth effects-driven consumption spending might slow from their current pace, but are likely to remain a tailwind for some time," he said. "Corporate earnings have been strong -- unusually so for this stage in the business cycle." On Thursday, official data showed the US economy grew at an annual rate of 3.4% in the third quarter, marking the strongest growth since the same quarter of 2025, aided by robust consumer spending.