PADUCAH — Local community leaders learned more about economic growth and uncertainty, inflation, and interest rates at a monetary policy luncheon Wednesday.
St. Louis Federal Reserve President Alberto Musalem was the keynote speaker of the luncheon hosted by the Paducah Area Chamber of Commerce and Greater Paducah Economic Development.
St. Louis Federal Reserve President Alberto Musalem, left, discussed economic growth and uncertainty, inflation, and interest rates alongside Seema Sheth, with the Louisville branch of the St. Louis Federal Reserve, at the Paducah Area Chamber of Commerce and Greater Paducah Economic Development luncheon Wednesday.
Musalem detailed his personal views and predictions of the state of the economy, saying he believes it is continuing to expand, though at a reduced pace, and is being sustained by a full-employment labor market and relatively supportive financial conditions.
He said he believes economic growth has slowed to a moderate rate since the beginning of the year, and cited “growing caution” among businesses as a contributing factor.
“Many [businesses] comment that uncertainty about tariffs and other economic policies and their likely effects has made planning difficult,” Musalem said. “Until there is more clarity, many businesses have adopted a wait-and-see posture rather than going forward with significant new hiring or fixed investment.”
Musalem said the pace of consumer spending has decreased since the start of the year, a portion of which was due to “rough winter weather.”
"Many of our retail contacts reported significantly reduced foot traffic and sales when the weather was bad, but a rebound when conditions improved. Conceivably, consumer spending growth will accelerate with the arrival of spring," he said.
Musalem also discussed short and long-term inflation rate predictions during the discussion. He said there is more work to be done to bring inflation down to the 2% target, but said the rate has “declined considerably” from its peak.
Musalem said it is “probable” that inflation will be higher than expected three to six months ago, and stated there is potential for the inflation rate to increase in the near future.
St. Louis Federal Reserve President Alberto Musalem said it is “probable” that inflation will be higher than expected three to six months ago, stating there is potential for the inflation rate to increase in the near future.
"The risks that inflation will stall above 2% or move higher in the near term appear to have increased. Market and survey measures indicate that near-term inflation expectations have risen, with higher tariffs often cited as the main driver” he explained.
New tariffs are expected to have direct and indirect effects. Musalem said the direct effects are one-time price-level increases that should not have a long-term impact on inflation. He said the indirect effects on non-imported goods and services could impact underlying inflation.
“Several recent surveys indicate that more firms have or are planning to raise prices in coming months compared with surveys from the fourth quarter of 2024,” he said. "Those results are consistent with reports from Eighth District business leaders who tell us they expect to pass higher materials costs on to their customers. Firms also tell us their suppliers have recently raised prices or have warned that increases are coming after tariff increases are implemented.
Although near-term inflation is likely to increase, Musalem said longer-term expectations “appear stable.” He expects inflation to decline to 2% by 2027.
“I am watching closely for signs that elevated near-term expectations could seep into longer-term inflation expectations, which would make the job of restoring price stability and maintaining full employment more difficult,” he said.
Earlier in the discussion, Musalem explained his support of the Federal Open Market Committee’s decision last week to leave its policy interest rate unchanged.
He said he believes a “patient approach” when it comes to the interest rate will help maximum employment, price stability, and economic expansion, explaining that the effects of the FOMC reducing the interest rate the fall of last year have yet to be discernible.
"Growth is going to moderate, according to my expectations, but it's going to still be going at a healthy rate, and the labor market, I expect, will continue to be around full employment, so there's no particular urgency to lower interest rates,” Musalem said.
He emphasized the importance of visiting communities, like Paducah, within his Federal Reserve district to prepare for FOMC meetings.
“In talking with business and community leaders, I have learned about economic conditions across our district, the nation and the global economy. I share insights from these conversations when I participate in FOMC meetings, and my colleagues from other Reserve banks do the same by reporting on their regions,” he said.
Seema Sheth, senior vice president and regional executive of the Louisville branch of the St. Louis Federal Reserve, also attended the event. She said providing community input is essential to inform FOMC decisions.
“A lot of what my job is to do is come to these communities and elevate the stories that are happening here locally, so that when we conduct monetary policy, it is both effective for those in those larger cities and those folks that are here in smaller communities,” she said.
