WRAPUP 1-Fed's Musalem sees no imminent need to change monetary policy stance

By Michael S. Derby and David Lawder

WASHINGTON, April 1 (Reuters) - St. Louis Federal Reserve President Alberto Musalem said on Wednesday there is no need for the U.S. central bank to change its interest rate stance right now in the face of rising inflation risks tied to the war in the Middle East.

"Policy is well positioned" and "I expect the current setting of the policy rate will remain appropriate for some time," Musalem said in a speech at the American Enterprise Institute in Washington.

"The economic outlook is highly uncertain," he said. And while the baseline case is for decent economic growth, a stable unemployment rate and further moderation in inflation, he added that "uncertainty from the Middle East conflict and unsettled tariff policy could weigh on consumer and business spending in the first half of the year."

Musalem also said "higher fuel, aluminum and fertilizer prices" could dent the economy.

In this environment, job market and inflation risks "both tilt in unfavorable directions, that is, toward a weaker labor market and greater persistence of above-target inflation," he added.

Musalem noted that the Fed traditionally looks through supply shocks as temporary drivers of higher inflation, but said the current situation may be different given how long inflation has been above the U.S. central bank's 2% target. "History suggests caution is warranted" and, given the recent path of price pressures, "supply shocks may be more likely to have a persistent impact on inflation and inflation expectations."

He said he expected that headline inflation is going to be affected on a "one-for-one" basis by the surge in commodity prices and that there would be a period in which it ran high. He added that there also would be some pass-through to core inflation that would merit close monitoring.

The Cleveland Fed's real-time inflation estimates on Wednesday showed signs of building price pressures, with the "nowcast" for Consumer Price Index running at 3.71% in April on a year-over-year basis, up from the March reading of 3.25%. The "nowcast" for the Personal Consumption Expenditures Price Index, the Fed's preferred inflation gauge, stood at 3.58% in April versus 3.28% in March.

The data showed less of an impact on core prices, which exclude volatile food and energy items.

Musalem warned that even a swift resolution of the U.S.-Israeli conflict with Iran will have a hangover impact on the economy. "Even if the war were to end, it's going to take time to bring a lot of the damaged capacity ... back on stream," he said.

FED OUTLOOK CLOUDED BY UNCERTAINTY

In an interview with Reuters, Richmond Fed President Thomas Barkin said the public appears to be braced for a manageable short-term jump in energy prices.

"My instinct is you've still got a short-term lens on this," he said. When it comes to high energy prices, "if you think this is a two- or three- or four-week thing, an extra $10 to $15 isn't great, but it doesn't fundamentally change your standard of living. If you ​think this is going to last for a long time, that's when I think you're more likely to see pullback."

The Fed last month maintained its benchmark overnight interest rate in the 3.50%-3.75% range as it awaits data on the impact of the war with Iran, which has led to a surge in energy prices and has started to upend key global supply chains.

Fed policymakers penciled in one rate cut for 2026 in economic projections released at their March 17-18 meeting, and have not signaled since then any imminent need to change the policy stance. Financial markets have oscillated between expectations of hikes and cuts based on the inflation outlook.

Musalem said he could favor easing policy if "a greater risk of a weakening labor market becomes apparent" so long as the risk of higher inflation is low. He added that a hike could be in the cards "to avoid an inadvertent real easing that would result from holding the policy rate constant if core inflation or medium- to long-term inflation expectations moved persistently higher and away from (the) 2%" target.

He noted that financial conditions are still "broadly accommodative" and stress in private credit markets is largely limited to that sector and not a sign of broader woes.