Higher rates could be needed to avoid ‘inflationary mindset’ taking hold, says Fed’s Hammack

Speaking during the annual gathering of the National Association of Business Economics, Hammack emphasized that moving early and steadily is far superior to waiting until a crisis forces a more disruptive policy shift. Her remarks suggest that additional interest rate hikes could be on the horizon as the Federal Reserve continues its ongoing battle to cool persistent price pressures and steer annual inflation back down to its stated target of 2%.

"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," Hammack, who serves as a voting member of the Federal Open Market Committee, said in prepared remarks delivered at the conference. "Considering all the inputs that factor into my reaction function, a restrictive monetary policy stance is appropriate to ensure a timely return to 2 percent inflation."

Hammack’s commentary provides further insight into the mindset of central bank officials following a pivotal shift in monetary policy. Last month, the Fed voted to increase interest rates for the first time in three years, marking a decisive turn in a cycle that had previously seen a prolonged pause and subsequent easing discussions. Minutes from the Fed’s September meeting later revealed that officials are actively weighing the possibility of voting to raise rates again, though they left open questions regarding the exact timing of such a decision.

Market participants are currently parsing these signals to gauge the trajectory of borrowing costs for the remainder of the year. According to the CME Group’s FedWatch tool, traders have priced in a greater than 78% likelihood that the central bank will keep interest rates unchanged at its upcoming policy meeting later this month. However, sentiment shifts significantly further out on the calendar, with market participants seeing a nearly 88% chance of another rate hike at the Fed’s final meeting of the year in December.

During her address, Hammack elaborated on the complex environment facing consumers, businesses, and monetary policymakers alike, pointing out that sticky inflation continues to pose significant structural challenges. The Cleveland Fed chief explained that given the sheer breadth of current inflationary pressures across various sectors of the economy, she expects it will take some time to successfully guide annual price growth down to the central bank’s desired 2% objective.

Recent economic data underscores the stubborn nature of these price increases. The personal consumption expenditures price index—the Fed’s preferred inflation gauge—came in at 3.4% year over year in August. Meanwhile, the core reading of the index, which strips out notoriously volatile food and energy costs to provide a clearer picture of underlying price trends, registered at 3% compared with the same period a year prior. While these figures show a departure from the multi-decade highs seen in previous years, they remain comfortably above the central bank’s comfort zone, justifying the calls from officials for a sustained restrictive stance.

Despite headline inflation remaining above target for an extended period, Hammack noted one major bright spot in the broader macroeconomic landscape: the resilience of public confidence in the central bank’s commitment to price stability. Long-run inflation expectations have remained remarkably well anchored, she observed, even though actual inflation has stayed above the central bank’s target for more than five years.

Even so, Hammack warned against complacency, stressing that the central bank cannot afford to take this hard-won credibility for granted. With each passing month that inflation remains persistently elevated, she cautioned, the risks grow that an inflationary mindset could become permanently entrenched in the psychology of businesses and consumers, making future stabilization efforts even more difficult.