On recent market volatility, including the sharp selloff in equity prices and increases in some credit spreads, Musalem said he was watching a broad set of financial market indicators and feels that financial conditions have tightened.
But Fed officials are becoming more concerned that the expected price increases from the tariffs as announced, along with retaliation by other nations, could potentially translate into more persistent inflation that would require tighter monetary policy; slowing growth, on the other hand, could possibly raise unemployment, a situation the Fed would otherwise want to counter with easier monetary conditions.
How monetary policy responds will depend on how inflation and unemployment evolve in coming months, whether the price shock appears to be persistent, and whether inflation expectations remain consistent with the Fed's 2 per cent inflation target, said Musalem, a voter this year on interest rate policy.
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