After the US PPI data, two senior Fed officials made important statements!

Louis Federal Reserve Bank President Alberto Musalem warned on Friday that the risk of inflation accelerating has increased even as signs of a softening labor market emerge.

Speaking at an event held in Hot Springs, Arkansas, Musalem warned that recent economic and political developments, including trade and financial changes, could lead to a dual challenge such as rising prices and weakening employment. He noted that while this was once seen as a less likely outcome, the risk is now "closer to the baseline."

Musalem said, "The uncertainty regarding the net effects and timing of new trade, migration, fiscal, and regulatory policies on prices, employment, and economic activity is high," and added: "A scenario where inflation rises while the labor market softens is a distinct possibility that needs to be considered."

Musalem emphasized the importance of keeping long-term inflation expectations stable, calling for continued close monitoring of incoming data. Musalem continued his remarks as follows: "I believe that continuing to act cautiously, carefully monitoring incoming data, and comprehensively assessing the outlook and risks related to employment and inflation remain appropriate for monetary policy."

Musalem's comments came at a time when some Fed officials, particularly those willing to keep interest rates steady in the face of potential inflationary pressures tied to tariffs stemming from President Donald Trump's policies.

Musalem stated that while he expects the current economic expansion to continue, it will likely progress at a slower pace. He highlighted tightening financial conditions, including falling stock prices and widening credit spreads, as factors that could drag down growth if they persist.

He also reiterated concerns that some price increases related to customs duties could have permanent effects and that the FED may need to counteract these effects with policy moves. However, he also acknowledged the difficulty of detecting such effects in real-time.

Musalem, who said "It may be appropriate to lean against the inflationary effects in the second round," stated that most long-term inflation expectations are close to the FED's 2% target, but noted that the University of Michigan's survey showed signs that concerns have increased.

According to the data released on Friday, Americans expect average prices to rise by 4.4% over the next five to ten years, which is the highest rate seen since 1991. The short-term price increase expectation also rose to 6.7%, reaching its highest level since 1981.

Musalem concluded his remarks as follows: "High economic policy uncertainty, tighter financial conditions, and the retaliation of trading partners against U.S. tariffs together create downward risks for economic growth and employment. Ensuring that inflation expectations are well anchored provides a balanced approach to monetary policy, focusing appropriately on the maximum employment side of the mandate."

New York FED President John Williams stated that due to tariff policies and declining immigration, it is expected that U.S. economic growth will slow significantly, and that real GDP growth may fall below 1%. Williams also projected that the unemployment rate will increase between 4.5% and 5% next year, while inflation is expected to rise between 3.5% and 4%.