Exclusive-Fed's Musalem says more rate hikes likely needed to quell inflation

WASHINGTON, Sept 21 (Reuters) - The Federal Reserve will likely need to hike interest rates further to lower inflation resulting from strong demand as well as a commodity price shock that has moved beyond oil, St. Louis Fed President Alberto Musalem said on Monday, adding that it would be better for the US central bank ‌to act sooner than wait.

"Both persistent demand and recurring supply forces are continuing to contribute to keeping inflation risks elevated, and I judge that without further policy restraint on ‌inflation it is more likely to be substantially above our 2% target in 18 months than at target," Musalem said in an interview with Reuters.

"I think it's crucial that policy puts a meaningful restraint on inflation" so the Fed reaches its ​inflation target in about a year and a half, allowing time for tighter policy to impact the economy, he said.

Musalem, who is not currently a voting member of the central bank's rate-setting Federal Open Market Committee, would not comment on the Fed's possible next steps or the estimated level the policy rate may need to reach to lower inflation.

But "earlier and incremental policy firming is better and less disruptive than later and larger and potentially more abrupt policy action" further in the future, he said.

Inflation "is not a risk. It's there," Musalem said, noting that even after stripping out the impact of oil and other supply-related factors, underlying inflation ‌is running perhaps a percentage point above the Fed's target and is "moving ⁠in the wrong direction."

Little progress has been made recently in the battle to bring inflation back down to the 2% target. The Personal Consumption Expenditures Price Index, the Fed's main inflation gauge, was at 3.7% on a year-over-year basis in July, compared to a recent low of 2.3% in April of 2025, ⁠as the Trump administration rolled out its plan for global import tariffs.

The shock to import prices was followed this year by the start of the US-Israeli war with Iran, which pushed up fuel costs globally, with the price of diesel hitting a record high recently. Prices for commodities like copper have also been rising, Musalem said, as an offshoot of the artificial intelligence investment boom.

Through it all, US domestic spending and growth have remained resilient — ​good ​news from one perspective, but an additional inflation challenge for the Fed.

"We have both strong demand forces and ​supply forces working themselves through the economy," Musalem said.