Exclusive-Fed’s Musalem says oil shock likely to keep core inflation near 3%, rates on hold for some time

Federal Reserve official Musalem indicated that the ongoing oil shock is expected to sustain core inflation near 3%, reinforcing expectations for an extended pause in rate hikes. The transmission mechanism centers on energy-driven cost-push inflation, which is broadening into underlying price pressures, complicating the disinflation trajectory. This outlook increases the likelihood of prolonged restrictive monetary policy, keeping real yields elevated and weighing on interest-rate-sensitive assets like long-duration equities and Treasuries. Markets are now pricing in fewer rate cuts for 2024, with the next CPI release—particularly the core goods and shelter components—serving as a key catalyst for potential shifts in forward guidance.

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