Investing.com -- St. Louis Federal Reserve President Alberto Musalem said Monday that the central bank will likely need to raise interest rates further to bring down inflation driven by strong demand and rising commodity prices beyond oil.

Musalem told Reuters that without additional policy restraint, inflation is more likely to remain substantially above the Fed's 2% target in 18 months than reach that goal.

"I think it's crucial that policy puts a meaningful restraint on inflation" to reach the target in approximately 18 months, allowing time for tighter policy to affect the economy, Musalem said.

The St. Louis Fed chief, who is not currently a voting member of the Federal Open Market Committee, declined to discuss the Fed's possible next steps or the level rates may need to reach. He stated that earlier and incremental policy firming is better and less disruptive than larger and potentially more abrupt action later.

Musalem noted that even after removing the impact of oil and other supply-related factors, underlying inflation is running about one percentage point above the Fed's target and is moving in the wrong direction.

The Personal Consumption Expenditures Price Index, the Fed's main inflation gauge, stood at 3.7% year-over-year in July, compared to a recent low of 2.3% in April 2025, when the Trump administration introduced its global import tariffs plan.

The import price shock was followed this year by the start of the US-Israeli war with Iran, which pushed up fuel costs globally, with diesel prices hitting a record high recently. Copper and other commodity prices have also risen as a result of the artificial intelligence investment boom, Musalem said.

US domestic spending and growth have remained strong throughout, creating an additional inflation challenge for the Fed.

The Fed raised interest rates by a quarter percentage point last week and removed a reference in its policy statement that attributed recent inflation "in part" to supply shocks, saying only that "inflation remains elevated."

Musalem said the current 3.75%-4.00% policy rate is on the accommodative side, meaning it is not yet high enough to restrict economic activity.

Investors currently expect the Fed to approve three more quarter-percentage-point rate hikes over the five policy meetings between now and April, with roughly even odds the central bank will raise rates again in October. The median projection of Fed officials issued after last week's meeting showed policymakers expect one more hike this year, with a near-even split over another potential move in 2027.

Musalem said he does not believe tighter policy would need to come at the cost of higher unemployment or increase the likelihood of a recession. The labor market is stable and balanced around full employment and is not a source of inflation, he said.

Firms in his Fed district are reporting sharply higher non-labor input costs in fuel and other raw materials, transportation, insurance, and skilled labor, and are planning to raise their selling prices, Musalem said.