The head of the Federal Reserve Bank of Cleveland said in an interview that she prefers for the central bank to hold its benchmark interest rate unchanged “for quite some time,” but that a rate hike might be possible.
Beth Hammack said Monday in an interview with the Associated Press that an interest rate hike could be appropriate if inflation remains persistently above the central bank’s 2% target, the latest sign that some policymakers are moving away from a bias toward reducing borrowing costs.
Hammack also said the Fed might have to cut its rate if higher gas prices caused the economy to slow and unemployment to rise. Should inflation remain elevated, a rate hike could be needed, she said.
“I can foresee scenarios where we would need to reduce rates … if the labor market deteriorates significantly,” Hammack said. “Or I could see where we might need to raise rates if inflation stays persistently above our target.”
The AP noted that Hammack’s comments suggest a growing concern among some policymakers that inflation, which was elevated before the Iran war, may require rate hikes to tame it further. Rate increases by the central bank would be a sharp shift from late last year, when it cut its key rate three times.
Rate increases could lift borrowing costs for consumers and businesses, including for mortgages, auto loans, and credit cards.
Door Opened for Rate Hikes
Other Fed officials have recently opened the door to rate hikes.
And minutes of the Federal Reserve’s meeting in late January said that several of the 19 officials on the rate-setting committee supported altering the post-meeting statement to reflect the possibility of “upward adjustments” to rates.
President Donald Trump has harshly criticized the Fed for not cutting rates further. He has called for the central bank’s key rate to be lowered to 1%, down from its current level of about 3.6%.
On Friday, the government will issue the March inflation report, providing a first read on the impact of higher gas and energy prices.
The AP reported that economists forecast that annual inflation will worsen significantly, jumping to 3.1% from 2.4% in February, according to a survey by data provider FactSet.
On a monthly basis, economists expect consumer prices rose 0.8% in March from February, which would be the biggest increase in almost four years, the AP noted.
The Commerce Department will report the Fed’s preferred inflation gauge for February on Thursday, though that will not incorporate any impact from the Iran conflict, the AP reported.
Hammack noted that the Cleveland Fed’s own estimates show inflation could reach 3.5% in April, which would be the highest since 2024. Inflation spiked to 9.1% in June 2022 before slowly declining.
Inflation Above Target Range
“Inflation has been running above our target for more than five years now,” Hammack said, and a further increase would mean it is “moving in the wrong direction, away from our 2% objective,” the AP reported.
The Federal Reserve’s dual mandate from Congress is to seek low inflation and maximum employment, and higher gas prices could threaten both those mandates, creating a challenging situation for Fed officials.
Consumers may react to higher gas prices by cutting back on their spending elsewhere in the economy, Hammack noted, which might lead to weaker growth and layoffs, which the Fed would need to respond to with rate cuts.
Hammack said rising gas prices stemming from the Iran war are “the No. 1 thing” she hears about from people in her district, which covers Ohio and parts of Pennsylvania, West Virginia, and Kentucky.
“We know that causes a lot of pain personally, as it eats up a bigger and bigger share of people’s paychecks. So it’s important for us to stay focused on it,” Hammack said.
Hammack’s voice joins that of a chorus of Fed officials who have commented on the economy and the effects of the war on it.
A Ripple Effect
For example, Federal Reserve Bank of New York President John Williams warned that the effects of the Iran War on energy prices could have a ripple effect across multiple sectors of the economy during a recent Fox Business interview.
“There’s a pass-through of energy prices into a lot of things that we buy, including airfares. … With higher fuel costs, airfares are going to go up,” William said. “It will spread around. It typically takes us into other goods and services. That typically takes months or maybe a year to have that full effect.”
Williams addressed the gas price spike, saying it puts a strain on household budgets already pressured by inflation. The national average for a regular gallon of gas is over $4, up more than $1 since the war began, according to AAA.
“Higher energy prices affect inflation. It affects also the disposable income that families have, too,” he said. “So, it hits both inflation, but also it hits demand in the economy.”
He said the New York Federal Reserve is well-positioned for potential risks.
“I think monetary policy, with the actions we took last year and where we are today, is actually well-positioned to keep those risks in balance, and that’s what we need to do,” he said.
Williams noted that the war on Iran wasn’t a risk the bank could have anticipated and it highlights the limits of monetary policy in responding to sudden geopolitical shocks.
“We can’t control everything in terms of gas prices … changing, but what we can do is try to get monetary policy positioned so that those risks we achieve in our two goals are in balance,” Williams said.
Williams emphasized the importance of an anticipatory approach in monetary policy.
Rising Inflation Risks
“We have to be forward-looking,” he said. “We have to be looking where the economy is likely to be in the next year or two, because monetary policy actions, they don’t take the full effect on the economy for at least a year.”
St. Louis Federal Reserve President Alberto Musalem said last week that he doesn’t see a near-term need for the Fed to alter its position on interest rates, but warned of rising inflation risks tied to the war with Iran.
“Policy is well positioned to address risks to both dual mandate objectives, and I expect the current setting of the policy rate will remain appropriate for some time,” Musalem said in the text of a speech delivered before a gathering at the American Enterprise Institute in Washington.
Musalem emphasized the uncertainty ahead.
“The economic outlook is highly uncertain,” Musalem said. And while the baseline outlook holds for decent levels of growth, stability in the unemployment rate, and further moderation in inflation, Reuters reported that he added that “uncertainty from the Middle East conflict and unsettled tariff policy could weigh on consumer and business spending in the first half of the year.”
Musalem also said financial conditions are still “broadly accommodative” and stress in private credit markets largely is contained to that sector and is not a sign of broader woes.
Earlier, Chicago Federal Reserve President Austan Goolsbee said in an interview that he’s more worried about inflation now than he is about unemployment.
In a CNBC interview, Goolsbee noted that Fed policymaking is difficult in the current environment.
Hold Short-Term Rates Steady
“The most important thing is to figure out the through line of what is happening,” Goolsbee said in a “Squawk Box” interview. “What makes this a fraught but intense moment is nobody can tell us what is going to happen on the ground in the conflict in the Middle East, and how long that lasts.”
Goolsbee dissented on a rate cut in December and said that he agreed with the majority to hold short-term rates steady at the January and March meetings of the Federal Open Market Committee.
He is not an FOMC voter this year but will vote again next year. Last week, FOMC officials last week indicated a majority still expect a cut this year and another the next.
Goolsbee said that his inclination will depend on the progress of inflation, and he cautioned against “a repeat of the team-transitory mistake” where the Fed underestimated the severity of inflation in 2021.
Saying there was still opportunity for interest rate cuts later this year, Federal Reserve Governor Christopher Waller recently expressed caution about current economic conditions.
And, Fed Governor Michelle Bowman said that she believes the Fed can cut three times this year, which would take the benchmark federal funds rate below the neutral level that FOMC officials see as neither supporting nor restricting growth.
Waller, who previously advocated for rate cuts, said that recent developments in the labor market, as well as the uncertainty of the war with Iran, require a more conservative approach.
Still Expects ‘Strong Growth’ This Year
“It doesn’t mean that I’m going to stay put for the rest of the year,” Waller said on “Squawk Box.” “I just want to wait and see where this goes, and if things go reasonably well and the labor market continues to be weak, I would start advocating again for cutting the policy rate later this year.”
In a Fox interview, Bowman took her position even though she said she expects “strong growth” this year, supported by the supply-side policies that this administration is putting into place.”
Bowman is one of just three Fed officials who see aggressive rate cuts this year, according to a recent update of the Fed’s “dot plot” grid.
