By Ann Saphir
May 28 (Reuters) - St. Louis Federal Reserve President Alberto Musalem on Thursday said the central bank may need to increase its policy rate if inflation does not resume easing within the next six months, adding his voice to an increasingly hawkish cohort of Fed policymakers just as Kevin Warsh takes the reins as Fed chair.
"If we don't see disinflation in the next one to two quarters, that would concern me," Musalem said at a Central Bank of Iceland and Northwestern University economic
conference in Reykjavik as he laid out scenarios that in his view may require a Fed rate hike. "Right now my view is that the risks have tilted more towards the inflation side than the labor market side."
U.S. inflation increased at its fastest pace in three years in April, data published Thursday by the Commerce Department's Bureau of Economic Analysis showed, with the personal consumption expenditures price index rising 3.8% from a year earlier on higher energy prices amid the war with Iran.
Musalem said he could see a world where a rate cut could be needed later this year, if for instance growth slows and the labor market, now stable, begins to weaken again. Unemployment was 4.3% in April and economists expect it to stay there this month.
But he made clear that he is more worried about the opposite scenario, especially if inflation expectations continue to drift higher or remain elevated, a signal that the public doesn't believe the Fed will beat back inflation and that the worries could become self-fulfilling.
"I see risks that inflation may not converge to target as we would like," he said. "So we need to be very vigilant."
Musalem's hawkish remarks followed a speech in which he warned of the risks of banking on AI's potential for boosting productivity, and therefore pushing down on inflation, before there is clear evidence it is doing so.
Warsh, who was sworn in as Fed chair less than a week ago, has said he believes AI will be a strong disinflationary force, a view that suggests he could support the easier monetary policy that President Donald Trump says the economy needs and that he expects Warsh to deliver.
The Fed has kept its policy rate in the 3.50%-3.75% range all year and financial markets are pricing in a better-than-even chance of a rate hike by the end of 2026. Central bankers next meet to set policy in mid-June.
(Reporting by Ann Saphir; Editing by Chizu Nomiyama )
