St. Louis Fed's Musalem Says More Rate Hikes Are Coming, Markets Now Price Three More Into Next Spring

Since the Federal Reserve raised its benchmark rate a quarter point last week, its first hike in three years, to a range of 3.75% to 4.00%, the debate over whether that was the right call has only gotten louder. St. Louis Fed President Alberto Musalem intensified that debate Monday, September 21, telling Reuters the Fed will likely need to hike again, and soon.

'Not a Risk. It's There.'

Musalem, who currently is not a voting member of the FOMC, said in the interview that persistent consumer demand combined with recurring supply shocks are keeping inflation risks elevated. Without more policy restraint, he said, inflation is more likely to sit "substantially above" the Fed's 2% target in 18 months than to hit it.

"Inflation is not a risk. It's there," Musalem said, adding that even stripping out oil and other supply-driven factors, underlying inflation is running as high as 3% and "moving in the wrong direction." He called the Fed's current 3.75%-4.00% rate "on the accommodative side," meaning he thinks it may still be adding stimulus rather than restraining the economy, according to Investing Live's summary of his remarks.

Musalem broadened the inflation story beyond the oil shock tied to the U.S.-Israeli war with Iran, pointing to copper and other base metals as an emerging pressure point, one he linked to demand from the artificial intelligence investment boom. He said business contacts are telling him they plan price increases near 3%, and that firms are seeing sharply higher costs across fuel, raw materials, transportation, insurance and skilled labor.

He also drew a clear line on jobs: the labor market, he said, remains stable near full employment and "is not a source of inflation." That distinguishes his argument from a classic wage-price spiral story.

The data backs up part of his case. The Fed's preferred gauge, the Personal Consumption Expenditures Price Index, ran at 3.7% year-over-year in July, up sharply from a 2.3% low in April 2025, according to Reuters. Diesel prices have hit record highs this year.

Markets Are Already Betting He's Right

Investors aren't waiting to find out. Investing Live reported that markets are now pricing three more quarter-point hikes across the Fed's next five meetings, running into next spring, with roughly even odds of another move as soon as October.

The Pushback: Where's the Proof?

Breitbart's Business Digest argued the Fed may be hiking at exactly the wrong moment, built on a "novel theory" that repeated supply shocks will de-anchor inflation expectations even if there's no evidence that's actually happening.

Breitbart pointed out that 10-year breakeven inflation expectations, a standard market gauge, sit right where they were in February, before the Iran war pushed up gasoline prices. Longer-term expectations have barely moved, and the Atlanta Fed's measure of business inflation expectations remains benign. Breitbart also noted the current inflation shock isn't comparable to the Biden-era spike, which it attributes to deficit spending under the American Rescue Plan combined with the Fed holding rates too low for too long, not supply shocks.

Moody's Analytics chief economist Mark Zandi made a related point, cited by Breitbart: squeezing inflation down faster requires pushing growth below its potential, a tradeoff the Fed may be underweighting. Reuters' survey found 85% of economists expected the quarter-point hike that came, and futures markets had priced a 90% chance of it happening, meaning not hiking would have jolted markets that had already built the move into pricing. Neither side of the professional forecasting community has an obvious edge here. It comes down to Musalem's inflation-first argument against Zandi's growth-risk argument, and both are grounded in data rather than guesswork.

The Political Wrinkle

Fox News flagged the added complication: Fed Chairman Kevin Warsh, Trump's pick to lead the central bank, delivered the rate hike over the president's public objections, with midterms less than two months away. Higher rates raise borrowing costs on mortgages and car loans right as Trump wants cheaper credit to boost his economic message. Asked directly what message he had for Trump, Warsh said, "I've got nothing for you on a discussion," underscoring the Fed's insistence that it sets policy on economic data, not political calendars.

Markets shrugged off the hawkish talk for now. The S&P 500 closed up 1.49% Monday to 7,764.22 and the Nasdaq jumped 2.26% to 27,122.09 on an AI-driven rally led by Advanced Micro Devices, according to the Economic Times, while gold fell 0.6% to $4,349.94 an ounce as the dollar strengthened on rate-hike expectations.

The open question is whether Musalem's view carries the committee. He isn't a voting FOMC member this year, and Warsh has not committed to a specific path. The next scheduled FOMC decision will show whether Musalem's push for hiking "sooner rather than later" wins out over Zandi's case for patience, or whether Warsh splits the difference.