Cleveland Federal Reserve President Beth Hammack delivered a hawkish message Monday, suggesting the Federal Reserve may need to continue raising interest rates to bring inflation back to its 2% target.
- Speaking at the National Association for Business Economics annual meeting, Hammack argued that the economy remains strong enough to withstand additional monetary tightening and warned that inflation risks continue to favor higher prices.
Why it matters: While Hammack did not explicitly endorse another rate hike at the next FOMC meeting, her remarks strongly suggest she remains open to additional tightening. She said smaller, more frequent policy adjustments are generally preferable to waiting and potentially needing larger corrections.
Inflation remains the problem: Hammack pointed to headline PCE inflation of 3.4% in August and core inflation of 3.0%, both higher than a year earlier. She warned that price pressures are broad-based, driven by higher energy costs, tariffs and the massive AI infrastructure buildout.
- She also expressed concern that businesses are beginning to anticipate continued inflation and raise prices accordingly, potentially creating a self-reinforcing inflation cycle.
The labor market isn’t a concern: Hammack noted that unemployment remains relatively low at 4.2%, while jobless claims and mass layoff announcements remain subdued. She also highlighted strong consumer spending, robust business investment and continued economic growth as evidence that the economy can withstand higher interest rates.
What about mortgage rates? Hammack did not specifically address mortgage rates or housing affordability. However, she acknowledged the recent significant increase in bond yields, citing expectations for stronger growth, higher policy rates, elevated energy prices and expanding global debt issuance.
- Perhaps more importantly, Hammack said financial conditions are now roughly neutral rather than restrictive, suggesting that even the recent surge in Treasury yields hasn’t sufficiently slowed the broader economy.
The bottom line: Hammack’s remarks reinforce the possibility of another Fed rate hike, although she stopped short of committing to one. She warned that inflation remaining above expectations could require even higher interest rates. For mortgage rates, that’s a troubling message: a Fed that believes the economy can withstand additional tightening is unlikely to provide much relief to the bond market anytime soon.