Fed's Musalem: says he does not yet see productivity gains in the macro data, remains focused on PCE inflation rather than CPI, and believes policy is in a good place.

Fed's Musalem: says he does not yet see productivity gains in the macro data, remains focused on PCE inflation rather than CPI, and believes policy is in a good place.

Fed’s Musalem Emphasizes Caution on Productivity, Stresses PCE Inflation Focus

St. Louis Fed President Alberto Musalem recently reiterated his cautious stance on the role of productivity gains in curbing inflation, stating that while he remains hopeful about a potential shift to a "higher productivity regime," it is "too early to call that" and even earlier to rely on such trends for achieving the Federal Reserve's 2% inflation target according to Musalem's remarks. His remarks, delivered during an MNI Webcast on January 13, 2026, underscored the central bank's continued focus on stabilizing inflation expectations and maintaining policy discipline.

Musalem highlighted that current macroeconomic data do not yet reflect significant productivity-driven disinflationary pressures. "I see little reason for near-term further easing of policy," he emphasized, noting that inflation remains above target and that the Fed should not "outsource our job of bringing inflation back towards 2%" to unproven productivity trends as Musalem stated. This aligns with broader Federal Reserve priorities, as the central bank's inflation target is defined in terms of the personal consumption expenditures (PCE) price index, not the more widely cited consumer price index (CPI).

The PCE index, which the Fed has preferred since 2000, offers a broader measure of inflation by including spending on behalf of households (e.g., employer-paid health insurance) and adjusting weights monthly to reflect shifting consumption patterns according to the Cleveland Fed. In contrast, the CPI, while historically used for cost-of-living adjustments, tends to overstate inflation due to its narrower scope and annual weight updates. Musalem's emphasis on PCE aligns with the Fed's focus on a metric that captures nuanced consumer behavior, such as substitution toward cheaper goods when prices rise.

Musalem also reiterated the importance of anchoring inflation expectations, a theme explored in depth by the St. Louis Fed. Unanchored expectations—where households and businesses anticipate higher inflation—can erode policy credibility and necessitate more aggressive rate hikes, as seen in historical data. By maintaining a data-dependent approach and prioritizing PCE inflation, Musalem signaled confidence in the current policy framework, stating that "policy is in a good place" as the Fed navigates the path to price stability according to his remarks.

Why Inflation Expectations Are Important to Policymakers: Why Inflation Expectations Are Important to Policymakers
Infographic on Inflation: CPI versus PCE Price Index: Infographic on Inflation: CPI versus PCE Price Index
Fed Officials Cautious About Rising Productivity's Contribution: Fed Officials Cautious About Rising Productivity's Contribution