Hammack cautions Fed policy may not be tight enough as inflation expectations risk rising

Hammack's remarks were hawkish in tone, adding weight to the argument for more rate increases. Such a backdrop typically boosts the dollar and lifts short-dated Treasury yields. Her assertion that financial conditions are not restrictive carries particular market significance, as it challenges the notion that the September rate hike was sufficient. Input costs reported by businesses remain heavily influenced by fuel expenses, making oil prices the key factor in whether her inflation expectations materialize. A steeper rate path also acts as a drag on gold, which tends to decline when tightening expectations rise.

Hammack is more concerned about the public beginning to anticipate inflation than about its current level, and this difference might make it easier for her to support another rate increase.

• Hammack indicated that if inflation expectations deteriorate, the Fed would probably need to respond with greater force.
• She cautioned that an inflationary mindset would complicate monetary policy's task considerably.
• Firms are reporting notable input cost pressures, and lower-income households are grappling with inflation.
• She noted that it is difficult to determine the neutral interest rate level.
• She added that financial conditions do not look restrictive at present.
• She made these remarks at a Goldman Sachs event in New York.

On Thursday, Cleveland Fed President Beth Hammack issued a warning that any worsening in inflation expectations would probably demand stronger action from the Fed. Her comments reinforce indications that officials are ready to continue raising rates.

At a Goldman Sachs event in New York, Hammack stated that her primary worry is the development of an inflationary psychology, where consumers and companies anticipate ongoing price rises. If such expectations become entrenched, she argued, policy would lose effectiveness, requiring the Fed to tighten more than it might have.

Hammack noted that companies are experiencing strong input-cost headwinds, and that lower-income individuals are increasingly voicing their difficulties with inflation. She emphasized the importance of informal feedback from firms and communities, as well as hard data, in assessing the economy.

Regarding the policy outlook, Hammack said it is hard to pinpoint the neutral rate — the level that neither boosts nor slows growth. She also remarked that financial conditions do not seem restrictive at present. This assessment suggests that current policy may be insufficient to reduce inflation.

Hammack's remarks arrive as the Fed continues its tightening cycle. In September, the central bank lifted its target range by 25 basis points to 3.75%-4.00%, the first increase in this round. The next policy meeting is scheduled for October 27-28. Hammack is a voting member of the FOMC this year.

Overall, the comments indicate a lean toward additional tightening rather than a halt. Her focus on expectations, not just the current inflation reading, is significant. It implies that if surveys or corporate reports suggest price pressures are becoming embedded, she may be more inclined to back another rate increase. However, she did not specify when any move might occur.

These remarks are expected to heighten market focus on Fed Chair Kevin Warsh, who is due to speak later during the Asian trading session, as well as on forthcoming inflation expectations data.