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Central BanksMediumUpdated×2•Originally published 30 October 2026•Updated 30 October 2026•
4 min read

Musalem Calls for Rate Hike Soon as PCE Inflation Rises to 3.6%

Key Facts

1Personal consumption expenditures inflation was 3.6% annually in September 2026, and core inflation was 3.1%.
2The Fed held its target interest rate range at 3.75% to 4% on October 28 in a 10-to-2 vote.
3Real gross domestic product grew at an annual rate of 3.4% in the third quarter, compared with 2.2% in the second quarter.
4The probability of a December rate hike was 84.6% according to the FedWatch tool after the October 29 data release.

Alberto Musalem said further monetary policy tightening would be necessary "soon," calling for a rate hike after the Federal Reserve held its target range on October 28. The president of the Federal Reserve Bank of St. Louis added that moving early in smaller steps is less disruptive than making larger, sudden increases later. His position comes as annual inflation in the personal consumption expenditures price index stood at 3.6% in September, and at 3.1% excluding food and energy. Musalem's remarks reflect his assessment of the policy path, while the official decision remained with the Federal Open Market Committee. Musalem was not among the committee's voting members in 2026, according to the Fed's published roster.

The committee kept its target interest rate range at 3.75% to 4% in a decision approved by 10 votes to 2. Lisa Cook and Beth Hammack voted to raise the range by a quarter of a percentage point rather than leave it unchanged. The Fed said economic activity was expanding at a solid pace and inflation remained elevated. In its statement, it added that accumulating more information would help the committee determine the appropriate policy stance to ensure inflation returned to its 2% target in a timely manner. According to the meeting record, the committee had raised rates in September before holding them in October.

Data from the Bureau of Economic Analysis showed annual inflation in the personal consumption expenditures price index accelerated from 3.4% in August to 3.6% in September. The core index rose from 3.0% to 3.1% over the same period, according to bureau data and coverage cited by Reuters. On a monthly basis, the headline index rose 0.5% and the core index 0.3% in September. By contrast, real consumer spending increased by $2.6 billion, less than 0.1% month on month, while real disposable personal income fell 0.3%. The September data were published after the October rate decision, giving the committee a more recent indicator ahead of its next meeting.

On the activity front, real gross domestic product grew at an annual rate of 3.4% in the third quarter, compared with growth of 2.2% in the second quarter, according to the Bureau of Economic Analysis' advance estimate. The bureau attributed the acceleration in growth mainly to faster investment and a shift to higher government spending. This was partly offset by a decline in exports, while imports increased more than they had in the previous quarter. The reading presents a picture of stronger overall growth alongside rising inflation, while September data showed a limited increase in real consumer spending and a decline in real disposable income. Inflation remains above the committee's 2% target, according to its statement.

Musalem said smaller steps, with inflation expectations remaining stable, had a better chance of succeeding without an adverse effect on the labor market or economic growth. That sets out his case for moving early at a time when the current annual inflation reading exceeds the committee's target. On borrowing costs, the average rate on a 30-year U.S. mortgage was 7.4% in early October before falling to 7.32% in the week before the Associated Press report published on October 27. The report said the rate had approached a three-year high before declining. The available data do not directly link that rate to Musalem's remarks.

Markets priced in an 84.6% chance of a rate hike in December after the inflation data were published on October 29, according to the CME FedWatch tool, as cited by Reuters. An earlier estimate cited by the Associated Press after the October decision put the probability at about 85%, with most economists expecting a quarter-point increase at the next meeting. The Fed scheduled its next meeting for December 8 and 9, 2026. Before then, the Bureau of Economic Analysis is due to release October personal income and spending data and its second estimate of third-quarter GDP on November 25. Those releases will come ahead of the committee meeting at which it will decide its next interest rate stance.