Cleveland Fed’s Hammack Signals Possible Rate Hikes to Curb Inflation

Beth Hammack, president and CEO of the Federal Reserve Bank of Cleveland, spoke on Monday about the ongoing inflation challenge facing the U.S. economy and the need for potential further tightening of monetary policy. Delivering remarks at the National Association of Business Economics annual conference, Hammack emphasized the importance of carefully calibrated interest rate adjustments to bring inflation back toward the Federal Reserve's 2 percent target.

Hammack, who holds a voting seat on the Fed's policy-setting committee, stated that incremental and timely rate changes are preferable to waiting and then implementing larger corrections. "When feasible, I generally think it's preferable to make smaller adjustments, and to do so relatively quickly, rather than to wait and risk needing a larger course correction," she said.

She described the current monetary stance as restrictive, highlighting it as necessary to ensure a prompt return to the Fed's inflation goal. Her remarks suggest that more interest rate increases could be forthcoming, adding to signals from the Fed's September meeting minutes where officials indicated a willingness to raise rates again, though they did not specify the timing.

Last month, the Federal Reserve raised interest rates for the first time in three years, a move that underscored the central bank’s commitment to address persistent inflationary pressures. Market participants currently assign over a 78 percent probability that rates will be held steady at the Fed’s upcoming policy meeting this month, according to CME Group’s FedWatch tool. However, expectations for a rate hike at the Fed’s final meeting of the year in December stand at nearly 88 percent.

Hammack pointed to the widespread nature of inflationary pressures as a key factor complicating efforts by consumers, businesses, and policymakers. She noted that due to the broad-based inflation currently observed, it will likely take time to reduce annual price growth to the Fed’s 2 percent goal.

Data released in August showed the personal consumption expenditures (PCE) price index rose 3.4 percent year over year. The core PCE index, which excludes the often-volatile food and energy sectors and is closely watched by the Fed, increased 3 percent compared to the same period last year.

Despite inflation running above target for more than five years, Hammack observed that long-term inflation expectations remain well anchored. Still, she warned this should not be taken for granted. "With each passing month, persistently elevated inflation raises the risks of an inflationary mindset becoming entrenched in the economy," she said, highlighting the challenge of preventing inflation expectations from becoming unmoored.

The Federal Reserve’s approach to inflation has been a critical focus for financial markets and policymakers since inflation surged following the COVID-19 pandemic and related disruptions. While inflation has moderated somewhat from its peak levels, it continues to run above the central bank’s preferred range, prompting ongoing debate about the appropriate pace and scale of interest rate adjustments.

Hammack’s comments reflect a cautious stance that balances the risks of moving too slowly with the economic costs of overtightening. Gradual, smaller rate hikes done promptly could help manage inflation while minimizing shocks to the economy. This approach aligns with the Fed’s dual mandate to achieve maximum employment and stable prices, ensuring sustainable economic growth over the medium term.

As the Fed navigates this complex environment, Hammack’s perspective offers insight into the thinking at one of the system’s regional banks. Her emphasis on vigilance against an inflationary mindset underscores the delicate balance central bankers must strike as they seek to anchor inflation expectations and guide the economy through uncertain conditions.