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Inflation will move toward 2% target, but risks to outlook are rising, says Fed’s Musalem

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Alberto Musalem, President and CEO of the Federal Reserve Bank of St. Louis, speaks to the Economic Club of New York, in New York City, U.S., Feb. 20, 2025.

Brendan McDermid | Reuters

WASHINGTON — The risks for higher inflation are on the rise, St. Louis Federal Reserve President Alberto Musalem said Monday.

During a keynote address at the National Association for Business Economics conference, Musalem noted that his baseline case is for inflation to gradually move toward the central bank’s 2%. This scenario requires inflation expectations to remain anchored and stable, he noted.

However, “near-term inflation expectations have risen substantially over the last few weeks, and that’s something I’m watching closely,” Musalem added.

Indeed, the February reading on The Conference Board’s consumer confidence index reflected the largest one-month drop since August 2021, as inflation expectations rise. The Institute for Supply Management’s manufacturing PMI also showed a sharp increase in prices within the sector for the month.

“Businesses and households are clearly more sensitive to expectations of higher inflation,” Musalem said. “That’s why the risks seem more skewed to the upside, but the baseline is for continued disinflation.”

Investors came into 2025 expecting the Fed to lower rates this year. However, the central bank kept rates at their current 4.25%-4.5% range after its January meeting, where it noted that inflation remained “somewhat elevated.”

The CME Group’s FedWatch tool also shows that traders are pricing in a 93% likelihood that the Fed will keep rates at their current levels.

Musalem’s remarks come as investors brace for U.S. tariffs on imports from China, Mexico and Canada — with many worried the levies will drive prices higher, thus making it harder for the Fed to ease rates going forward.

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T. Rowe Price likes stock picking now

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One of the largest active ETF managers on leveraging fund tactics in new ways

It appears T. Rowe Price is benefitting from the record growth in actively managed exchange traded funds.

Tim Coyne, the firm’s head of ETFs, reports the firm is seeing significant growth in the area — listing the T. Rowe Price Capital Appreciation Equity ETF (TCAF) and T. Rowe Price U.S. Equity Research ETF (TSPA) as two established strategies that can satisfy investor demand.

“I think having that professionally managed portfolio is really beneficial to clients,” Coyne told CNBC’s “ETF Edge” this week. “We’re seeing just… greater volatility [and] uncertainty across both the equity and fixed income markets.

According to Coyne, the T. Rowe Price Capital Appreciation Equity ETF suits investors who are looking for long-term growth.

“The objective of the fund is to outperform the S&P 500 with lower volatility and greater tax efficiency,” he said. “It’s also a more concentrated portfolio, typically holding around a hundred names.”

As of April 24, the fund’s top holdings include Microsoft, Amazon, and Apple according to the T. Rowe Price website. But it’s not all Big Tech. The ETF also features smaller positions in companies like Becton Dickinson and Roper Technologies.

The T. Rowe Price Capital Appreciation Equity ETF is down about 5% so far this year while the S&P 500 is off about 7% However, the ETF is up close to 8% over the past year — roughly identical to the S&P 500’s performance.

Coyne notes the T. Rowe Price U.S. Equity Research ETF follows a similar strategy, but with a heavier weighting in top tech stocks.

“This is more of a large-cap growth product [T Rowe Price U.S. Equity Research ETF],” he said. “There are components of characteristics of both passive and active here. This fund is actually managed by our North American directors of research. So again, strong fundamental research is going into the stock selection.”

Both the T. Rowe Price U.S. Equity Research ETF and S&P 500 are down around 7% since the beginning of the year. Meanwhile, the fund is up almost 9% over the past year. That’s less than one percent better than the S&P 500’s performance.

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T. Rowe Price U.S. Equity Research ETF vs. S&P 500

‘Some form of bear market’

Strategas Securities’ Todd Sohn thinks investment demand for active managers will continue to be strong.

“This is the type of the environment where it [active management] can actually shine,” the firm’s senior ETF and technical strategist said. “We are in some form of bear market. This is where the active manager really can come into hand and offer their solution they are doing right.”

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