Fed's Hammack says higher rates could be needed as risks of 'inflationary mindset' forming grow

Cleveland Federal Reserve President Beth Hammack told the National Association of Business Economics annual gathering on Monday that the central bank should prioritize fast, incremental adjustments to monetary policy to ensure a timely return to its 2 percent inflation target. The voting member of the Fed's policymaking committee argued that a restrictive stance is currently appropriate given the inputs factoring into her reaction function.

Hammack emphasized that making smaller adjustments relatively quickly is preferable to waiting, which risks needing a larger course correction. Her remarks indicate that additional interest rate hikes may be on the horizon, following September meeting minutes in which Fed officials signaled they could vote to raise rates again without specifying a timeline. The Federal Reserve last month voted to increase interest rates for the first time in three years.

Market participants have priced in divergent expectations for upcoming policy meetings. According to CME's FedWatch tool, traders see a more than 78 percent likelihood that the central bank will keep rates unchanged at its policy meeting later this month. Conversely, they assign a nearly 88 percent probability to a hike at the Fed's final meeting of the year in December.

Hammack stated that persistent inflation creates difficulties for consumers, businesses, and policymakers. She noted that the wide range of current price pressures means reducing annual growth to the central bank's target will require a period of time. The personal consumption expenditures price index rose 3.4 percent year over year in August, while the core index, which excludes volatile food and energy costs and is preferred by the Fed, increased by 3 percent over the same period.

Although long-run inflation expectations have remained well anchored despite actual inflation staying above target for more than five years, Hammack cautioned against assuming this stability is guaranteed. She warned that every additional month of elevated inflation increases the danger of an entrenched inflationary mindset taking hold in the economy.