Hammack: More tightening required to curb demand, pace of hikes uncertain

Hammack's statements underscore the Fed's hawkish stance, keeping the door open for consecutive rate increases even as markets anticipate a pause in October. Her attention to AI-driven capital spending and wealth effects places high-growth tech stocks in focus, as tighter policy designed to reduce investment and asset-fueled consumption impacts market valuations. These comments are likely to boost the dollar and short-term Treasury yields while pressuring gold, which typically declines when rate-hike expectations rise. Market participants will monitor whether other policymakers share her view that the inflation battle now directly targets demand rather than the labor market.

Hammack aims to cool an overheated economy without damaging the labor market, and she is explicit about which part of demand she would prefer to address first.

Summary of her key points:

• Cleveland Fed President Beth Hammack says rates must go higher to curb demand and reduce inflation, which she sees stuck between 2.5% and 3.0%.
• She approaches the October 27-28 meeting with an open mind on whether to hike after September's increase; markets currently expect a hold.
• Hammack hopes tighter policy can temper corporate investment or wealth-driven consumption without pushing unemployment above the current 4.2%.
• She warned that an inflationary psychology may be taking hold, with AI-related investment pressures spreading beyond data centers to other businesses.
• Business contacts describe a booming economy rather than preparing to pull back, according to Hammack, a voter this year who dissented in July in favor of a hike.

On Monday, Cleveland Federal Reserve President Beth Hammack stated that US interest rates need to increase further to restrain demand. She added that she hopes the Fed can lower inflation without harming a labor market that remains near full employment.

In a Reuters interview, Hammack said demand is fueled by rapid corporate investment and market-driven wealth gains supporting consumer spending, factors she believes keep inflation in a 2.5% to 3.0% range. She thinks restrictive monetary policy can cool these forces enough to reduce inflation without unemployment rising above the current 4.2%. She emphasized she is not trying to halt growth, only to slow it to a pace that eases price pressures. A decline in either business investment or consumption would help, she noted, and restraint on capital spending could reduce the burden on consumers.

Hammack said she will approach the Fed's October 27-28 meeting with an open mind about whether another hike is warranted following September's increase. She believes more restriction is needed but views the timing as an open question. Hammack is a voting member on rate policy this year and dissented in July in favor of a hike, while investors currently expect the Fed to hold in October. Her comments are among the clearest from a Fed official on using restrictive policy to directly cool demand.

With inflation high and the labor market stable, Hammack said the Fed faces a challenge on only one side of its mandate. She wants to address inflation deliberately to avoid unnecessarily weakening employment. She assessed that consumer spending is largely supported by higher-income households and the wealth effect.

Hammack said business contacts seem to be describing a booming economy rather than preparing for a downturn. She is worried that an inflationary psychology may be taking root among firms competing for resources, as relentless AI hyperscaler investment leaves cost as a secondary concern. Executives, she reported, are planning for sustained high inflation and expect to raise prices faster than their input costs. In her view, the pressure that started with data centers is now broadening.

Hammack described monetary policy as a single blunt instrument that she intends to use carefully, in the right amount and at the right speed, while maintaining that more restraint is needed. Her remarks leave the October decision finely balanced between market expectations of a pause and a hawkish group of policymakers who see a case for further tightening.