ST. LOUIS FED'S MUSALEM SAYS RATES LIKELY NEED TO RISE FURTHER TO TAME INFLATION

Musalem says that without further policy restraint, inflation is more likely to be substantially above the 2% target 18 months from now than at target, and that inflation is both demand- and supply-driven, per a Reuters interview.

Musalem: "Earlier and incremental policy firming is better and less disruptive than later and larger."

- Views the current 3.75-4.00% policy rate as on the accommodative side
- Even stripping out supply factors, underlying inflation is running perhaps a point above target and moving in the wrong direction
- The commodity shock extends beyond oil to base metals like copper
- Business contacts are planning price increases closer to 3%
- The labor market is stable around full employment and not a source of inflation pressure

Musalem is not a voting member of the FOMC this year and declined to comment on next steps or where the policy rate may need to go.