Fed’s Hammack Backs Restrictive Policy as US Inflation Broadens

• Cleveland Federal Reserve President Beth Hammack on Monday called for the US central bank to move toward a restrictive stance “relatively quickly.” Hammack argued that smaller, timely adjustments are preferable to waiting and potentially requiring a larger policy correction later.
• US inflation remains above the Federal Reserve’s (Fed’s) 2% target, with headline PCE inflation at 3.4% in August and core PCE at 3.0%, up from 2.7% and 2.9%, respectively, a year earlier. Hammack noted that price pressures have broadened beyond energy, suggesting inflation remains relatively widespread.
• Inflation pressures are also being reinforced by higher tariffs and demand associated with the AI investment boom, which has increased prices for computer, electronic and other high-tech components. Cleveland Fed estimates place underlying trend inflation in the mid-to-high 2% range, suggesting that a return to the 2% target could take time.
• The labour market remains relatively firm, with unemployment at 4.2%, while payroll growth has strengthened and mass-layoff indicators remain low. The Fed President also pointed to solid economic growth, resilient consumer spending and robust investment in data centres as evidence that the economy can withstand a tighter policy stance.
• Despite Hammack’s hawkish position, CME FedWatch shows markets pricing a 78% probability that the Fed will hold its policy rate at 3.75%–4.00% at the October 27–28 meeting, up from 51% a month earlier. Her comments come as policymakers continue to assess how persistent inflation, elevated energy prices and still-resilient economic activity should influence the pace of further tightening.
• Hammack’s comments reinforce the risk that US monetary policy may remain restrictive for longer than markets currently expect. With inflation broadening beyond energy while growth and labour-market conditions remain resilient, the Fed has greater scope to prioritise price stability, leaving upcoming inflation data particularly important for the timing of any additional rate increases.

(Source: Reuters)