The remarks lean hawkish and add to the case for further Fed tightening, a backdrop that tends to support the dollar and push short-dated Treasury yields higher. Her view that financial conditions are not restrictive is the more market-relevant line, because it argues against any assumption that the September hike was enough. Fuel costs remain central to the input cost pressures firms are reporting, so oil prices are the variable most likely to shape whether her expectations worry materialises. A firmer rate path is also a headwind for gold, which has tended to fall as hike expectations rise.
—
Still to come:
Warsh speaks in Bangkok after hot CPI: is a second Fed hike coming in October?
—
Hammack is less worried about where inflation is today than about Americans starting to expect it, and that distinction could lower her bar for backing another hike.
Summary:
Hammack said a worsening of inflation expectations would likely require more aggressive Fed action
Warned that an inflationary mindset would make monetary policy’s job much harder
Businesses are seeing significant input cost pressures, and lower-income Americans are struggling with inflation
Said it is hard to know where the neutral rate sits
Said financial conditions do not currently appear restrictive
Was speaking at a Goldman Sachs event in New York
Cleveland Federal Reserve President Beth Hammack warned on Thursday that a deterioration in the public’s inflation expectations would likely require a more forceful response from the central bank. Her remarks add to signs that policymakers are prepared to keep tightening.
Speaking at an event hosted by Goldman Sachs in New York, Hammack said her main concern was the emergence of an inflationary mindset, in which households and businesses come to expect persistent price pressures. If that took hold, she said, it would become much harder for monetary policy to do its job, and the Fed might need to move further than it otherwise would.
Hammack said businesses were reporting substantial pressure from input costs, and that she was hearing more from lower-income Americans who are struggling with inflation. She stressed the value of anecdotal reports from businesses and communities as a guide to the economy, alongside official data.
On the policy stance, Hammack said it is difficult to pin down where the neutral interest rate lies, the level that neither stimulates nor restrains the economy. She added that financial conditions do not currently appear restrictive. That view implies current settings may not be doing enough to bring inflation down.
Her comments come with the Fed already on a hiking path. The central bank raised its target range by a quarter point to 3.75% to 4.00% in September, its first increase in this cycle, and policymakers next meet on 27 and 28 October. Hammack votes on policy this year.
Taken together, the remarks point to a preference for further tightening rather than any pause. Her emphasis on expectations, rather than the current inflation rate alone, matters. It suggests her threshold for supporting another hike could be lower if surveys or business reports show price pressures becoming entrenched. At the same time, she did not commit to the timing of any move.
The comments are likely to reinforce market attention on Fed Chair Kevin Warsh, who speaks later in the Asian session, and on upcoming measures of inflation expectations.
This article was written by Eamonn Sheridan at investinglive.com.
