By Ann Saphir
(Reuters) -Even after the recent U.S. and China trade detente, the labor market looks likely to weaken and prices to head higher, St. Louis Federal Reserve President Alberto Musalem said on Tuesday - though if the de-escalation proves durable the Fed's current monetary policy stance could "remain appropriate."
Eased trade tensions, Musalem told the Economic Club of Minnesota, would allow the labor market to stay strong and inflation to remain on path to the Fed's 2% goal.
"In this scenario, the current stance of monetary policy, which is focused on bringing inflation back to 2% in the context of a full-employment labor market, will remain appropriate," he said. But that's only the case, he said, if the public continues to believe that inflation will come down, a faith that could be shaken if prices stay elevated.
"I believe policy should prioritize price stability in the face of persistent inflationary pressures that threaten to dislodge long-term inflation expectations," Musalem said.
And, he added in a discussion following his prepared remarks, even with anchored inflation expectations the Fed wouldn't necessarily lower rates if inflation remained too high and the economy wasn't weakening too much.
The Fed earlier this month left short-term borrowing costs in the range of 4.25%-4.50%, and Fed policymakers speaking since then have signaled they plan to leave them there while they wait for more clarity on how trade and other Trump administration policies play out.
The ongoing and unusually high uncertainty over economic policy under the Trump administration, Musalem said on Tuesday, is prompting households and businesses to pause spending and investment, which will slow the economy in a "meaningful" way if it continues.
But with tariffs equally likely to lead to more persistent inflation as to only temporary inflation, the Fed should not commit to rate cuts to cushion the economy until there is more certainty about how inflation actually behaves, Musalem said.