St. Louis Fed President Alberto Musalem said inflation is nearly a full percentage point above the Fed’s target, while the labour market is cooling in an orderly way. He spoke at the Missouri Athletic Club Speaker Series on Wednesday. He said his base outlook is for the economy to grow at or above 2%. He also said financial conditions remain accommodative, helped by deregulation and fiscal tailwinds. He expects unemployment to level off around 4.3% to 4.4%.

Inflation And Labor Market Backdrop

Musalem said about half of the extra inflation is coming from tariffs, and he expects that effect to fade as the year goes on. He added that inflation could stay high for longer, but that is not his base case. He said the job market could be exposed to higher layoffs, but again, that is not his base case. He also said policy is well balanced and is now neutral in real terms. He said a government shutdown may have pushed CPI inflation lower, and that this could last through April. Because of this, he said PCE inflation may be a better measure. He added that the Fed still needs to bring inflation back to target. In his view, that could support spending and growth, and it could also bring down the 10-year yield. He said he is looking forward to seeing what Warsh’s priorities will be, and he expects the Fed to keep focusing on its dual mandate under a new chair.

Market Implications In 2026

In 2025, the view was that fading tariff effects would pull inflation down. But the January 2026 CPI report showed inflation is still sticky at 2.6% year over year. This makes the return to the 2% target look slower than expected. The labour market is also still cooling in a steady, orderly way, as expected last year. The January 2026 jobs report showed unemployment ticking up to 4.2%, which is still strong by historical standards. For traders, this reduces the pressure on the Fed to cut rates because of job-market weakness. It supports a “higher for longer” view. A key change from last year is Fed leadership. In 2025, this was still only speculation. Now Chair Warsh has been confirmed and is leading the Fed. Markets are pricing in a more hawkish approach. His public comments have stressed “finishing the job” on inflation, similar to periods like 2022 when the central bank’s resolve was tested. With more uncertainty, assuming volatility stays low is risky. Demand is rising for options that protect against higher interest-rate volatility. Futures markets also show that the chance of a rate cut before mid-year has nearly disappeared. Strategies that benefit from a sideways, range-bound market may work better while the Fed stays on hold. Last year’s view that financial conditions were accommodative is now being tested. The 10-year Treasury yield rose 25 basis points in February 2026 alone, reaching 4.5% as markets reset expectations under a more hawkish Fed. This suggests that what looked “neutral” in 2025 is now seen as not restrictive enough to bring inflation back to target. Create your live VT Markets account and start trading now.

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