Fed's Musalem: Likely most of tariff impact on inflation will fade

St. Louis Federal Reserve President Alberto Musalem said on Friday that the US economic activity remains stable, per Reuters.

Key takeaways

"Bankers report that funding pressures have diminished, credit quality is good."

"Companies continue to report a shortage of skilled labor."

"Firms remain cautious on capital spending and hiring."

"Companies are using different strategies to adapt to tariffs, including cost-cutting and negotiating with suppliers."

"Companies are not yet resorting to layoffs to reduce costs."

"Companies that are most dependent on imports are passing along costs; those closer to consumers are less likely to raise prices so far."

"The Fed is now missing on its inflation target but not missing on its employment mandate; labor market around full employment."

"Looking ahead there is a risk that the Fed may miss on both inflation and employment, with downside risk to jobs."

"Likely that most of the impact of tariffs on inflation will fade."

"But there is a reasonable probability that there may be some inflation persistence."

"Labor market is in balance, but economic activity has been weaker and that poses risks to jobs."

"The Fed is balancing risks to both sides of its mandate right now."

"Data integrity is critically important to the economy."

Market reaction

These comments received a hawkish/neutral score of 6.2 from FXStreet Fed Speech Tracker. Currently, FXStreet Fed Sentiment Index stays near 111.00 after having retreated from 121.00 reached immediately after the Fed's policy announcement after the July meeting.

Meanwhile, the US Dollar Index clings to small daily gains at around 98.20.