Alberto Musalem, President of the Federal Reserve Bank of St. Louis, spoke at the Mississippi Bankers Association on Wednesday. He said uncertainty around tariffs and war is a headwind for the US economy.
He said tailwinds, including accommodative financial conditions, are currently greater than headwinds. He said the labour market appears to have stabilised after gradual cooling last year, and recent payroll growth has been around the breakeven rate.
Inflation Risks And Policy Uncertainty
He said inflation is meaningfully above the Fed’s target and that, alongside tariff and oil shocks, there is underlying inflation to monitor. He said risks exist for both parts of the Fed’s mandate, but the balance of risks has been shifting towards inflation.
He said there are plausible scenarios where interest rates would need to remain stable for some time, and that current policy is either neutral or slightly accommodative in real terms. He also said there are plausible scenarios that could lead to both rate cuts and rate rises.
He said the Federal Open Market Committee is committed to 2% inflation and that achieving the 2% target supports growth and employment. He said consumers and companies report struggling with higher and rising prices, and that higher aluminium, helium, and other input costs could be disruptive.
He said some firms are not hiring due to uncertainty. He added that monetary policy independence is valuable, and that the Fed should be accountable and communicate transparently.
Market Positioning And Risk Management
With underlying inflation risks growing, we should anticipate that the path for interest rates is now highly uncertain for the next few months. Plausible scenarios that could lead to either rate cuts or even rate hikes are now on the table, a significant shift in tone. The latest Core PCE reading for March 2026 came in at 2.9%, underscoring the persistence of price pressures.
This suggests unwinding bets on aggressive rate cuts for the summer, as the odds of rates remaining stable for a longer period have increased. Pricing in a “higher-for-longer” scenario through options on SOFR futures could be a prudent strategy. The market had been pricing in two cuts by year-end, which now seems overly optimistic.
Given that accommodative financial conditions are seen as a tailwind, a hawkish shift from the Fed could directly threaten equity market stability. The VIX has been hovering near multi-year lows around 13, suggesting complacency that may not be warranted. We should consider buying protection, such as puts on major indices, especially as the S&P 500 trades near its recent highs above 6,200.
The labor market is no longer providing a clear reason to ease policy, as it did during its gradual cooling phase in 2025. Last Friday’s jobs report showed nonfarm payrolls at a breakeven rate of 110,000, which is not weak enough to force the Fed’s hand on cuts. This stability removes a key pillar for the dovish argument that was gaining traction earlier this year.
We are hearing directly about rising input costs like aluminum and the disruptive potential of oil shocks. This points toward sustained inflation from the supply side, which monetary policy has less control over. Traders may look to establish or add to long positions in commodity futures to hedge against these specific inflationary risks.
Firms are openly stating that uncertainty is causing them to pause hiring, which could be a leading indicator of a broader economic slowdown if conditions tighten. This two-sided risk—sticky inflation versus a potential slowdown—makes options strategies like straddles more appealing. They allow a trader to profit from a large market move in either direction without having to perfectly predict the outcome.
