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(Bloomberg) -- Federal Reserve Bank of St. Louis President Alberto Musalem said it’s not clear any inflationary impact from tariffs will prove temporary, and he cautioned that secondary effects could prompt officials to hold interest rates steady for longer.

Musalem said there is a greater risk inflation could stall above the Fed’s 2% goal or move higher because of changes to tariffs and other factors, reiterating it’s vital for inflation expectations to remain stable.

“I would be wary of assuming that the impact of tariff increases on inflation will be entirely temporary, or that a full ‘look-through’ strategy will necessarily be appropriate,” Musalem said Wednesday in remarks prepared for an event in Paducah, Kentucky. “I would be especially vigilant about indirect, second-round effects on inflation.”

Musalem differentiated between the direct effect of levies — a one-time price increase — and the second-round effects that could have a more persistent impact on underlying inflation. Last week, Fed Chair Jerome Powell said any inflation effects from President Donald Trump’s trade policies are likely to be transitory, though he underscored much is still unclear.

The St. Louis Fed chief said he supported the central bank’s decision to keep rates steady last week and that a patient approach to policy will help officials evaluate incoming economic data. He laid out the various ways officials may respond, depending on what happens to the labor market and inflation.

If the economy remains strong and inflation remains above target, Musalem said the Fed’s current policy is appropriate. If the labor market stays healthy and there are “second-round” effects from tariffs, officials may need to keep rates “modestly restrictive” for longer, or consider a more restrictive policy stance, he said. And if the job market were to weaken alongside stable or easing inflation, he said “policy could be eased further.”

Inflation Expectations

With inflation still above the Fed’s 2% goal, it becomes even more important for officials to manage consumers’ expectations for future price growth, he said. Should inflation expectations become unmoored, Musalem indicated the Fed would likely need to prioritize its price stability goal compared to the central bank’s employment objectives.

“If inflation expectations are threatening to become unanchored or becoming unanchored in the long term, then the balanced approach may not work,” he said in a moderated discussion following his speech. At that point, “we would have to probably lean into the inflation side of our dual mandate, to make sure inflation expectations and inflation remain anchored.”

Musalem highlighted research from his staff estimating that a 10% increase in the “effective US tariff rate,” in line with the tariff hikes announced so far, could increase inflation by as much as 1.2 percentage points as measured by the Fed’s preferred gauge. That includes a 0.5 percentage-point increase from direct tariff effects and a 0.7 percentage-point rise due to indirect tariff effects.

Speaking with reporters after the event, Musalem said he now sees inflation reaching the central bank’s 2% target in 2027, later than what he forecast in December. He said prices for some domestically-produced goods could rise if they start to see increased demand because tariffs are making imported goods less appealing. However, he clarified that not all of the indirect inflationary effects from tariffs will be persistent.

Fed officials are dealing with an unusual level of uncertainty over the direction of government policy under the Trump administration and its potential impact on the US economy. Still, Musalem’s base case is that the economy will continue to grow at a moderate pace and the labor market will remain healthy.

Fresh projections released after the Fed’s latest gathering showed policymakers penciled in the equivalent of two quarter-point rate reductions for this year, according to the median forecast. However, eight of 19 policymakers saw one or no cuts for 2025.

(Updates with comments from Musalem’s call with reporters in the 10th paragraph.)